The Smart Way to Own RCL: Collect 10% Before You Even Buy
At about $280.16 a share, Royal Caribbean (RCL) is trading about 23% below its 52W high.
Do you think RCL stock is a good long-term bet at current levels? What about at a 30% discount at about $195 per share? If you think that is a steal, and have some cash ready to go, here is a trade.
10% annualized yield at 30% margin of safety, by selling Put Options.
- Sell a long-dated Put option expiring 1/15/2027, with a strike price of $195
- Collect roughly $1,230 in premium per contract (each contract represents 100 shares)
- That’s about 6.1% annualized yield on the $19,500 you’re setting aside for the possibility of buying the stock
- This cash parked in a savings or money market account will earn an extra 4.0%, taking total yield to 10.1%
- And you give yourself a chance to buy RCL stock at deep discounted price of $195
However, this is not the only stock strategy in town. Trefis High Quality Portfolio is a sophisticated framework designed to reduce stock-specific risk while giving upside exposure.
Possible Trade Outcomes: You Win Either Way
| Stock Price Outcome | What It Means For You |
|---|---|
| RCL stays above $195 | You keep the full $1,230 premium – 6.3% extra income over the next 375 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| RCL closes below $195 | You’ll be obligated to buy 100 shares at $195. But thanks to $1,230 premium, your effective cost basis is just $182.7 per share – a roughly 35% from current level. |
But to hold this trade with conviction, you want to see long term upside in the stock. Because if it comes to it, you want to be excited about buying the stock cheap.
First, you want fundamentals to check out. For details, see Buy or Sell RCL Stock or check Royal Caribbean Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold RCL Stock Long-Term
Royal Caribbean is a leader in a consolidated industry with significant barriers to entry. The company exhibits a wide moat through its strong brand, pricing power, and customer loyalty. The cruise industry is experiencing a strong secular tailwind driven by a shift in consumer spending towards experiences, particularly among younger demographics. This suggests a long runway for growth. If assigned the stock, we are comfortable holding a market leader with durable competitive advantages in a growing industry.
Competitive Advantage
We classify RCL’s economic moat as WIDE, with the primary source being Pricing Power
- Royal Caribbean has demonstrated significant pricing power, with consistently robust bookings at higher prices than in previous years, indicating inelastic demand.
- The company has successfully implemented price increases, particularly for last-minute bookings, capitalizing on strong consumer demand without significant customer churn.
- RCL’s loyalty program, the Crown & Anchor Society, fosters repeat business and increases switching costs through a tiered system of benefits.
See Royal Caribbean Full Analysis.
Industry Tailwind
The industry tailwind is STRONG, with CAGR projection of 12.9% (Source: Global Cruise Market Report)
Secular Trend: Shift to an experience-based economy, with growing demand from younger demographics (Millennials and Gen Z) and multi-generational travel.
Key Risks: Increasingly stringent environmental regulations regarding emissions and waste disposal, and the potential for lawsuits related to pollution.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: Royal Caribbean generated approximately $2 billion in free cash flow in 2024 and has been actively paying down long-term debt incurred during the pandemic, indicating a strengthening balance sheet and mitigating bankruptcy risk.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
Why Stock Pickers Win More With Multi Asset Portfolios
Stocks soar and sink but bonds commodities and other assets balance the ride. A multi asset portfolio keeps returns steadier and reduces single market risk.
The asset allocation framework of Trefis’ Boston-based, wealth management partner yielded positive returns during the 2008-09 period when the S&P lost more than 40%. Our partner’ strategy now includes Trefis High Quality Portfolio, which has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices