While the mainstream investing narrative rightly focuses on artificial intelligence and the broader tech ecosystem, speculators should also give online used car retailer Carvana (CVNA) some well-deserved respect. After crumbling following the end of the pandemic-induced honeymoon, CVNA stock has been one of the market’s top performers. Still, the increased valuation raises questions, forcing me to be neutral towards the company.

Normally, I could be completely bearish on CVNA stock. Yes, Carvana plays an important role: it is a convenient mechanism to buy and sell vehicles. However, American consumers are still affected by economic headwinds such as inflation. Because the underlying convenience comes at a price, consumers have other (cheaper alternatives). That makes Carvana’s business model contextually suspect.

At the same time, it is impossible to ignore the performance. Since the beginning of the year, CVNA shares are up more than 314%. In the past 52 weeks, it shot up nearly 636%. So there may not be an outright collapse, but rather a slowdown in enthusiasm. The flexibility of the options allows you to make money from a possible delay.

Navigate CVNA Stocks with the Unusual Options Screener

One of the relatively recent tools that TipRanks has developed for its website is the unusual options activity screener. Whether you’re big into derivatives trading or not, it’s always a useful screener to check. By showing transactions with higher volume than normal, you can gain insight into what the smart money is doing with its money.

Frankly, the overwhelming sentiment for CVNA stock has been bullish. However, some bearish sentiment trades have surfaced lately. That tells me that maybe not everything will go smoothly with Carvana as expected. Furthermore, the $240 call, which expires on January 17, 2025, is particularly intriguing. On October 23, the market recorded 4,598 sold contracts of this call option.

By logical deduction, we can reasonably assume that money is moving toward this $240 call. It is far out the money (OTM), making it relatively cheap. Indeed, market research shows that private investors prefer to buy ‘cheap’ options. However, usually it is only the big dogs that have the resources to sell thousands of options contracts.

Implemented the Bear Call Spread for Carvana

Interestingly, TipRanks’ unusual activity screener isn’t just useful for measuring sentiment. Instead, you can use it to shape your trades in the derivatives market. For example, we know that the aforementioned $240 January call is in high demand. Therefore, we can conclude that this derivative has a premium that is higher than normal. By selling this call we could then potentially get more bang for our buck.

Naturally, selling options directly carries with it the right of assignment (that is, the buyer of the option can exercise the position if it is profitable). Therefore, we may consider taking a limited risk approach called the bear call spread. In this setup we simultaneously sell a call and buy a call at a higher strike price. The last (long) part of this two-part transaction limits our risk if security turns against us; that is, if it goes higher.

An example to consider is buying the $250 call. As of Friday’s close, we would first collect gross income of $11.40 from the $240 call sale. This would offset the $9.34 gross depreciation paid 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 maintain full income. However, it cannot exceed the breakeven price of $242.06. If the shares hit $250 or more, we would lose a maximum of $7.94.

Risk factors to consider

With profits on the horizon for Carvana, CVNA stock is undoubtedly risky. If the stock rises above the aforementioned profitability threshold of $242.06, we risk losing significant amounts of money. 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 closing price, we theoretically have enough margin to cover a major breakout. Of course, it’s no guarantee, but it does provide a degree of confidence. Furthermore, if the above bear call spread ‘survives’ a positive earnings report, it is possible that the position could be profitable at expiration.

Following the release of an earnings report, the expected forward movement of the target security could decline sharply, a phenomenon known as volatility crush. It is also possible that traders could lock in profits after robust financial pressures, which would be a positive development for our bear call spread.

Wall Street’s take on Carvana

As for Wall Street, CVNA stock has a consensus rating of Moderate Buy, based on seven Buys, 10 Holds, and one Sell rating. The average CVNA price target is $182.19, which implies a downside risk of 12.16%.

View more CVNA analyst ratings

The bottom line: A potential slowdown in CVNA stock could deliver nice earnings

While Carvana has been one of the notable outperformers this year, it is possible that there will be a slowdown. If so, those who aren’t specifically sold on CVNA stock have a chance to earn some income with a bear call spread. In particular, speculators might consider selling the $240 call option as the short leg of the trade. As long as the price doesn’t rise more than 19% before expiration, the bears can be quite profitable.

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