Although online used-car dealership Carvana ($CVNA) has been on an absurdly successful run, a short-seller attack put a significant damper on CVNA stock. Nevertheless, the security remains popular with retail traders. As such, the anticipated rise in market kinesis opens a compelling options strategy called the long iron condor. This transaction represents a wager on increasing volatility rather than direction.
Indeed, selling tickets to the big game rather than betting on which team will emerge victorious may be the smarter approach. On the pessimistic side, short-seller Hindenburg Research blasted Carvana, labeling the company’s turnaround efforts as a “mirage.” In part, the controversial firm accused the auto retailer of accounting manipulation and lenient underwriting practices. Last Friday, CVNA stock lost more than 11% of equity value.
Meanwhile, JPMorgan analysts came to Carvana’s defense, doubling down on their Overweight rating. Moreover, the experts emphasized that they did not see any red flags that would warrant a short position. Given that both sides command strong arguments, it’s not clear where CVNA stock will head, making me directionally Neutral. However, shares will likely move somewhere, thus potentially empowering the long iron condor trade.
Fundamental Justification Exists for Both Sides of CVNA Stock
Even with last week’s implosion, CVNA stock has been an outperformer. Over the past 52 weeks, it skyrocketed almost 267%. Therefore, even though CVNA tanked nearly 16% from the opening salvo to the closing bell for the business week ending Jan. 3, many investors are willing to buy the dip.
From Carvana’s perspective, the dealership argues that Hindenburg’s report was “intentionally misleading and inaccurate,” characterizing the analysis as a cynical attempt to benefit from a decline in CVNA stock. Further, JPMorgan stated that while Carvana faces financial headwinds related to loan defaults, these challenges do not represent new news and are not exclusive to the auto retailer.
On the other hand, the fact that these problems are not unique doesn’t reduce the real challenges Carvana is facing. For example, consumer spending contributes about 70% to the U.S. GDP. If sentiment weakens — which is what rising loan defaults suggest — then the correction in CVNA stock may be at least partially justified. Basically, the bottom line is that it’s incredibly difficult to have confidence in a directional approach.
Explaining the Benefits of the Long Iron Condor
Given the ambiguous nature of where CVNA stock will ultimately head next, investors may choose to wager on this directional neutrality with a long iron condor. A multi-leg options strategy, the long iron condor combines two vertical spreads: a bull call spread and a bear put spread. Essentially, the transaction sets up two profitability zones, with the idea that traders are speculating on a strong movement in either direction.
Put another way, the trader plays both the bullish and bearish angles at the same time, making the long iron condor directionally neutral. However, the catch is that the trader pays a double premium: one to attack the upside profitability target and one to attack the downside. Therefore, the biggest enemy of this particular condor is stasis. If the underlying security doesn’t move anywhere, the transaction suffers the debit paid for both vertical spreads.
Nevertheless, the advantage of the long iron condor in an entity like CVNA stock is the assumed lack of directional predictability. Generally, the debate centers on where CVNA may move next; analysts do not seem to be making the argument that shares will simply stay rangebound. As a result, the long iron condor seems contextually prudent.
Narrowing Down the List of Carvana Condors
One of the challenges of iron condor strategies is the wide range of strike price combinations to choose from for popular securities. To narrow down the list, traders can deploy a dynamic statistical analysis. As mentioned earlier, CVNA stock lost nearly 16% last week. Over the past five years, whenever CVNA lost between 15% and 20% in a one-week period, there has been a 36.4% chance that by the fourth subsequent week, it would yield a positive return.
Interestingly, during these positive instances, the average return clocked in at 27.38%. On the negative instances, CVNA stock would average a loss of 41.6%. Applying these stats four weeks out from the Jan. 3 closing price yields a projected range between $103.46 and $225.67. To be honest, however, the nearly 42% projected loss seems rather extreme. By being more conservative and assuming a 25% loss, the downside target would be $132.87.
Now, it comes down to finding the best fit for the options chain expiring Jan. 31. Assuming the aforementioned statistical trends play out, arguably the most compelling long iron condor would be the 135P | 150P || 210C | 225C. In simpler terms, this condor represents the combination of the 135/150 bear put spread and 210/225 bull call spread.
Wall Street’s Take on Carvana
Turning to Wall Street, CVNA stock has a Moderate Buy consensus rating based on eight Buys, seven Holds, and zero Sell ratings. The average CVNA price target is $254.79, implying 28.45% upside potential.
The Takeaway: Uncertainty Over CVNA Stock Can be Profitable
Carvana’s volatility in the wake of the short-seller attack presents a unique opportunity to capitalize on movement, regardless of direction. The long iron condor fits this situation well, allowing traders to benefit from heightened price swings while sidestepping the risk of choosing sides. With strong arguments for both bullish and bearish outcomes, betting on volatility itself may prove more rewarding than attempting to predict where CVNA stock will land.
Ultimately, Carvana’s path forward is murky, but one thing seems clear — the stock is unlikely to stay still. Whether driven by renewed investor confidence or lingering doubts from the short-seller’s accusations, the current market environment suggests that CVNA will remain highly reactive. The long iron condor enables traders to harness this energy, making it a fitting strategy for the uncertainty ahead.
