Traders expect a monster 18% move in Carvana post earnings this week. How to play it

One of the most remarkable stocks over the past five years is Carvana (CVNA) . It reports earnings this week and traders are expecting a monster move. I’ll lay out a trade to capitalize on those expectations. Carvana’s business model revolves around buying and selling used cars online, aiming to streamline the car buying process by eliminating the traditional dealership experience. Customers can browse a large inventory of used vehicles on Carvana’s website, complete with detailed photos, 360-degree views, and vehicle history reports. Carvana offers financing options directly through its platform, allowing customers to get pre-approved and see personalized financing terms. Customers can trade in their old vehicles, receiving an instant offer through their website. Carvana delivers purchased cars directly to the customer’s home. In some locations, they also offer “Car Vending Machines,” where customers can pick up their vehicles. The company provides a seven-day money-back guarantee, allowing customers to return the car if unsatisfied, and a broader short-term warranty for the first 100 days or 4900 miles after purchase. Their model eliminates most of the negative associations of used car dealers by offering convenience, transparency, and a hassle-free car buying experience without the used car salesman. The company’s stock fell more than 80% from February 2020 in the pandemic plunge before rallying 1600% on record used car margins caused by supply constraints due to pandemic shutdowns. Then, it fell nearly 99% to levels well below the pandemic plunge, as rising interest rates and declining used car prices combined with a heavy debt load had investors speculating that the company would file for bankruptcy. With a new focus on financial discipline, the company has rallied more than 200% in the last 12 months(although still considerably off the mid-2021 highs). CVNA YTD mountain Carvana (YTD) Carvana will report earnings this coming Wednesday after the bell and the 18% earnings-related implied move ranks near the top of the Russell 1000 companies regarding earnings volatility. Expectations of high volatility are understandable, particularly when considering a few fundamental negative and positive drivers: The company’s balance sheet is highly leveraged, ~ with 5.7 billion in net debt (nearly 10x EBITDA). Nw car inventories are the highest since December 2019 at over 3 million vehicles, and new car margins are dropping, presumably a negative for the used car market, but… 2024 new car prices have averaged more than $47,000, arguably unsustainable, while used car inventories may still be undersupplied. This strange dichotomy within the car business, with sharply diverging fundamental drivers, justifies a large implied move, but the large implied move itself creates a steeply inverted volatility term structure that one may try to play for a “vol suck”; playing for the stock to remain within an 18% range post-earnings, such as a strangle swap as indicated here : Bought Oct. 18 $100 put Sold Aug. 2 $110 put Sold Aug. 2 $155 call Bought Oct. 18 $160 call Bear in mind that if one leans more bullish on an undersupplied used car market or bearish on increasing auto loan delinquencies and an oversupplied new car market, one can tweak the strangle swap trade to lean in the chosen direction. Bullish? Just trade the upside call portion of the trade (long October upside calls, short August calls). Bearish? Just trade the downside put portion of the trade (long October downside puts, short August downside puts). Overall, from a fundamental point of view, I’m not optimistic. Still, one additional consideration that can cause an upside spike, even when fundamentals aren’t great, is a high short interest, which in Carvana’s case is more than 17% of the float. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.