The first two trading days in 2025 are turning out to be more exciting than one would expect from a holiday-shortened week. Investors can thank Hindenburg Research for that.
Yesterday around noon, the well-known short-seller released a report suggesting Carvana (CVNA) was cooking its books, calling its 2024 turnaround a “Mirage.” As a result, 9.4 million CVNA shares traded Thursday, 3x the 30-day average.
More importantly for options investors, the put/call ratio was 2.06, nearly twice the ratio for Dec. 31 trading and one of the highest in the past three months. This was a clear sign that option investors saw blood in the water.
As for unusual options activity, Carvana had eight--seven calls and one put--with Vol/OI ratios of 1.24 or higher yesterday that expired in a week or more. It’s too early to report on the unusual options activity for today.
However, the volatility is already significant, with CVNA opening at $188.20 (6% lower) and 2.5 million shares traded less than an hour into trading.
Hindenburg has often been wrong about the stocks it targets, but investors are undoubtedly bearish about Carvana’s near-term direction. Here’s what to do about it.
Have an excellent weekend.
The Issue at Hand
As is the case with reports from the likes of Hindenburg Research, there is usually more than one troubling issue involved in their short theses. In Carvana’s situation, the top arguments why it is a ”Grift for the Ages” include a risk-filled subprime loan portfolio, lax underwriting standards, financial manipulation of its results by selling vehicles to a car dealer owned by Ernie Garcia II, the father of CEO Ernie Garica III, unsustainable loan sales to third parties, and significant stock sales by the father in the billions.
I have no idea whether this is true. All I know is investors flock to short-selling targets for near-term profits based on the ramped-up volatility of the stock--in this case, Carvana.
In fairness to Carvana, it has denied all allegations made by Hindenburg.
“The arguments in today’s report are intentionally misleading and inaccurate and have already been made numerous times by other short sellers seeking to benefit from a decline in our stock price,” a company spokeswoman said in an email. Since its initial public offering seven years ago, Carvana has been one of the most heavily researched public companies, she said,” Bloomberg reported.
So, taking reality out of the equation, I’ll focus on two groups: current shareholders who remain bullish and those who see Carvana as a house of cards ready to implode.
Using unusual options activity from yesterday and anything from today available early in trading, I’ll propose options strategies for each.
Long and Strong
Carvana stock has increased 309% over the past year. According to S&P Global Market Intelligence, its implied market cap, which includes LLC units in the operating company, approaches $43 billion, and its enterprise value is close to $48 billion.
That’s pretty impressive, given that it faced bankruptcy risk in 2022 and 2023. However, Carvana’s Altman Z-Score is currently 3.02, indicating that it is not at risk of bankruptcy proceedings in the next 24 months.
In the three months ended Sept. 30, Carvana’s adjusted EBITDA was $429 million, 190% higher than a year earlier, on $3.66 billion in revenue, 32% higher than Q3 2023. Its EBITDA margin was 11.7%, 640 basis points higher than a year ago.
On a non-GAAP basis, things look pretty healthy.
Today's put/call ratio is 2.43, higher than yesterday, on an options volume of 70,447 in 90 minutes. The options market continues to paint a negative picture for the stock.
If you are long and strong, a protective collar would be a strategy to implement. It involves selling a call out-of-the-money for income--it’s a covered call, given you own the stock--and buy a put, also out-of-money, to protect on the downside. Ideally, you want the premium you receive from the call to cover the cost of the put.
Here is one example from today’s unusually active options trading:
Selling the $200 call generates $6.00 in premium, offset by the $4.95 cost of buying the $185 put. Your net credit is $1.o5 with a maximum profit of $9.33 [$200 call strike + $1.05 net credit - $191.72 share price] and maximum loss of $5.67 [$185 put strike - $191.72 share price + $1.05 net credit].
It’s important to note that this is merely a static example. Given the volatile nature of its share price, the maximum profit and loss is always changing.
Bearish to the Bone
In this case, you should do a bear put spread for Carvana.
This is where you expect CVNA’s share price to fall in value. You buy a put option and sell a put at a lower strike price.
Using the same expiration date of Jan. 10, I see this possible trade:
In this case, the maximum loss is $0.48 [$3.35 ask price for buying $175 put - $2.87 for selling $170 put]. The maximum profit is $4.52 [$175 strike - $170 strike - $0.48].
So, to earn the $4.52, the Carvana share price has to fall to $170 by next Friday. As I said, I am bullish to the bone.
