Bulls have been scoring big lately — but few have had a better week than Carvana short squeeze hunting bulls — and the Market Rebels who followed them into battle.
Here’s a look at the crazy drive that Carvana shares have been on lately.
Source: Google, 5D Carvana chart.
The Carvana short squeeze was something to be admired — but what’s the best way that traders could have played it?
Why Options Were the Best Play Here (Not Shares)
So why take options into battle here? Simple.
When you (or in our case, a big (possibly institutional) buyer) anticipate a big move in a short-time period, you can count on options offering a better dollar-for-dollar return. Imagine that you spent $1,000 on Carvana when it was trading at $5.40. You should have bought 185 shares for $999 — with one dollar left over.
Imagine the same track — Carvana runs to $17.18. Now you have $3,178.30 worth of shares — plus, once again, your left over dollar. A total value of $3,179.30. That isn’t bad — but let’s imagine the same thing happens with the options bought below.
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Unusual Options Activity Spotted in Carvana (What They Bought)
On January 11th, with Carvana trading at just $5.40 per share, Market Rebellion identified the purchase of 5,600 February 3rd $7.50 strike calls bought for $0.40 on top of just 109 open interest. Fresh, big buying, on top of almost no open interest? And the options were roughly 40% out of the money? Okay, we’re watching — and so we alerted our Rebels immediately. We later saw repeat buying in Carvana with shares just under $10.
For the sake of comparison, we’ll just look at the $7.50 strike call options bought with Carvana at $5.40.
Recall that $1,000 in shares would have netted a total value of $3,179.30 after the wild ride Carvana took. But what about $1,000 spent on options? A trader could have purchased 25 options at the $0.40 trade price featured above for exactly $1,000.
If held until February 2nd (the time of writing, the same day we sold the theoretical shares above), those options could have been sold at $11.30 (current value), meaning those 40 options would have yielded a total value of $45,280. Both trades are excellent — but the options trade stands superior.
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