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 the collapse following the end of the pandemic honeymoon period, CVNA stock has been among the market's top performers. Nevertheless, the high valuation raises questions and forces me to assess the company neutrally.

Normally, I would be completely bearish on CVNA stock. Yes, Carvana plays an important role: it is a convenient mechanism for buying and selling vehicles. However, American consumers are still suffering from economic headwinds such as inflation. Since the underlying comfort comes at a price, buyers have other (cheaper) alternatives. This makes Carvana’s business model contextually questionable.

At the same time, the performance cannot be overlooked. Since the beginning of the year, CVNA stock has risen over 314%. It has shot up nearly 636% in the last 52 weeks. So there may not be a complete crash, but rather a slowdown in enthusiasm. The flexibility of options allows you to make money with a possible delay.

Navigating CVNA Stock with the Unusual Options Screener

One of the relatively new tools that TipRanks has developed for its website is the Unusual Options Activity Screener. Whether you are deeply into derivatives trading or not, it is always a useful screener to keep in mind. By viewing transactions that have higher volume than normal, you can gain insight into what the smart money may be doing with their funds.

To be fair, the overwhelming sentiment for CVNA stock has been positive. However, a few trades with bearish sentiment have emerged recently. This tells me that Carvana cannot be expected to run smoothly. Additionally, the $240 call expiring 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 the money is flowing towards that $240 request. It is well out of the money (OTM) and is therefore relatively cheap. In fact, market research suggests that retail investors prefer purchasing “cheap” options. However, it's usually only the big dogs that have the resources to sell thousands of options contracts.

Using the Bear Call Spread for Carvana

Interestingly, TipRanks' unusual options activity screener isn't just for measuring mood. Instead, you can use it to design your derivatives market trades. For example, we know that there is significant demand for the January $240 call mentioned above. From this we can conclude that this derivative has a higher than normal premium. We could then potentially get more bang for our buck by selling that call.

Of course, selling options directly involves the right of assignment (i.e. the option buyer could exercise the position if profitable). Therefore, we might consider adopting a risk-limited approach called “Bear Call Spread”. In this setup, we simultaneously sell a call and buy a call at a higher strike price. The final (long) part of this two-part transaction limits our risk if the security moves against us; that is, as it rises higher.

An example to consider is buying the $250 call. At the close of trading on Friday, we would initially make a gross profit of $11.40 from selling the $240 call. This would offset the $9.34 gross debit on the $250 call purchase, giving us a net profit of $2.06. To realize the full income, CVNA shares would need to stay at or below $240. However, the breakeven price of $242.06 cannot be exceeded. If the stock hits $250 or more, the most we would lose is $7.94.

Risk factors to consider

Given Carvana's upcoming earnings, CVNA stock is undoubtedly risky. If shares rise above the previously mentioned profitability threshold of $242.06, we risk 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 room to cover a major breakout. Of course, this isn't a guarantee, but it does provide a certain level of trust. Additionally, it is possible that the position could be profitable at expiration if the aforementioned bear call spread “survives” a positive earnings report.

Following the release of an earnings report, the target stock's expected price performance could decline sharply, a phenomenon called “volatility decay.” It is also possible that traders could make profits following a robust financial position, 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 Moderate Buy consensus rating based on seven Buys, ten Holds, and one Sell rating. The average CVNA price target is $182.19, implying a downside risk of 12.16%.

See more CVNA analyst ratings

The bottom line: A possible slowdown in CVNA stock could lead to some good returns

Although Carvana has been one of the notable outperformers this year, it is possible that a slowdown is occurring. If so, those who aren't particularly confident in CVNA stock have a chance to make some income with a bear call spread. In particular, speculators might consider selling the hot $240 call option as a short position of the trade. As long as the security doesn't rise more than 19% before expiration, the bears could make significant gains.

Disclosure