While the mainstream investment narrative rightfully focuses on artificial intelligence and the broader technology ecosystem, speculators should also give online used-car retailer Carvana (CVNA) well-earned respect. After crumbling following the end of the pandemic-fueled honeymoon, CVNA stock has been one of the market’s top performers. Still, the elevated valuation raises questions, forcing me to be Neutral on the enterprise.
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Ordinarily, I might be completely bearish on CVNA stock. Yes, Carvana serves an important role: it’s a convenient mechanism to buy and sell vehicles. However, American consumers are still reeling from economic headwinds such as inflation. Since the underlying convenience comes at a cost, shoppers have other (cheaper alternatives). That makes Carvana’s business model contextually suspect.
At the same time, it’s impossible to ignore the performance. Since the start of the year, CVNA stock gained over 314%. In the past 52 weeks, it shot up almost 636%. So, an outright tumbling might not occur but rather a slowing of enthusiasm. Thanks to the flexibility of options, you can make money off a potential deceleration.
Navigating CVNA Stock with the Unusual Options Screener
One of the relatively recent tools that TipRanks has developed for its website is its unusual options activity screener. Whether you’re big on trading derivatives or not, it’s always a useful screener to monitor. By showing transactions that feature more elevated volume than normal, you can get an insight into what the smart money may be doing with its funds.
To be fair, the overwhelming sentiment for CVNA stock has been bullish. However, some bearish-sentiment trades have been popping up recently. That tells me that perhaps not everything is anticipated to go smoothly with Carvana. What’s more, the $240 call expiring on January 17, 2025, is especially intriguing. On October 23, the market recorded 4,598 contracts sold of this call option.
By logical deduction, we can reasonably surmise that money is gravitating toward this $240 call. It’s far out the money (OTM), making it relatively low-priced. Sure enough, market research indicates that retail investors prefer buying “cheap” options. However, it’s usually only the big dogs that have the resources to sell thousands of options contracts.
Deploying the Bear Call Spread for Carvana
Interestingly, TipRanks’ unusual options activity screener isn’t just useful for measuring sentiment. Instead, you can use it to help craft your derivative market trades. For instance, we know that there’s significant demand for the aforementioned $240 January call. Therefore, we can infer that this derivative carries a higher-than-normal premium. Subsequently, by selling this call, we could potentially get more bang for our buck.
Of course, selling options outright carries the right of assignment (i.e., the option buyer could exercise the position if profitable). Therefore, we may consider adopting a risk-capped approach called the bear call spread. In this setup, we simultaneously sell a call and buy a call at a higher strike price. The latter (long) leg of this two-leg transaction limits our risk if the security moves against us; that is if it moves higher.
One example to consider is to buy the $250 call. As of Friday’s close, we would first collect gross income of $11.40 off the $240 call’s sale. This would offset the gross debit paid of $9.34 for the $250 call purchase, giving us a net income of $2.06. We would need CVNA stock to stay at or below $240 to keep the full income. However, it cannot exceed the breakeven price of $242.06. If shares hit $250 or above, we would lose a maximum of $7.94.
Risk Factors to Consider
With earnings coming up for Carvana, CVNA stock is undoubtedly risky. If shares swing above the previously mentioned profitability threshold of $242.06, we would be at risk of losing significant funds. However, TipRanks also calculates that the upcoming earnings report could result in a move (up or down) of 13.71% or $28.41.
Since the breakeven point is 19.52% above Friday’s close, we theoretically have enough margin to cover a big breakout move. It’s not a guarantee, of course, but it does offer some level of confidence. What’s more, if the above bear call spread “survives” a positive earnings report, it’s possible that the position could end up being profitable at expiration.
Following the disclosure of an earnings report, the expected forward movement of the target security could decline sharply, a phenomenon known as volatility crush. It’s also possible that traders could secure profits following a robust financial print, which would be a positive development for our bear call spread.
Wall Street’s Take on Carvana
Turning to Wall Street, CVNA stock has a Moderate Buy consensus rating based on seven Buys, 10 Holds, and one Sell rating. The average CVNA price target is $182.19, implying 12.16% downside risk.
The Takeaway: A Potential Slowing of CVNA Stock Could Yield Some Nice Income
Although Carvana has been one of the remarkable outperformers this year, it’s possible that a deceleration could occur. If so, those who aren’t particularly sold on CVNA stock have a chance to earn some income with a bear call spread. In particular, speculators may consider selling the hot $240 call option as the short leg of the trade. As long as the security doesn’t move up by over 19% before expiration, the bears could be handsomely profitable.
