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Carvana Keeps Disrupting An Established Industry

Carvana Keeps Disrupting An Established Industry

If you’ve ever bought a car, you may have an opinion about the process. Many consumers dislike the car buying process, a trait that makes the industry ripe for disruption.

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  • One business is doing that as Business Wire reported, Carvana (NYSE: CVNA), an e-commerce platform for buying and selling used cars, grew its South Carolina presence [recently], offering as-soon-as-next-day vehicle delivery to Florence and Spartanburg.

    In as little as 10 minutes, customers can shop more than 15,000 vehicles on Carvana.com, finance, purchase, trade in and schedule as-soon-as-next-day delivery.

    Customers can also sell their current vehicle to Carvana and receive a real offer in just minutes, then schedule as-soon-as-next-day pickup of that vehicle. [This] launch marks the seventh market for Carvana in the Palmetto State.

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    Traders did not seem to react much to the news.

    CVNA daily chart

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  • Because Carvana customers shop online from the comfort of home or on the go via their mobile device, they can skip the dealership and gain access to a great selection, with great prices and a great customer experience, saving valuable time and money.

    All 15,000+ vehicles in Carvana’s national inventory are photographed in 360 degrees to provide customers with a high-definition virtual tour.

    Additionally, as an upgrade to the traditional test drive, all Carvana vehicles come with a 7-day return policy, giving customers the peace of mind and time to ensure the vehicle fits their life.

    Every Carvana vehicle is Carvana Certified, meaning it has undergone a rigorous 150-point inspection, has no frame damage and has never been in a reported accident. Features, imperfections and updated information about open safety recalls are listed on the car’s vehicle description page.

    “We have steadily been increasing our South Carolina presence since launching here in 2017,” said Ernie Garcia, founder and CEO of Carvana.

    “As we’ve seen growing demand for The New Way to Buy a Car, we’re looking forward to bringing our easy, transparent process to Florence and Spartanburg residents.”

    Carvana now offers as-soon-as-next-day vehicle delivery in 133 markets across the U.S.

    These moves are consistent with the company’s goals to change the way people buy cars. By removing the traditional dealership infrastructure and replacing it with technology and exceptional customer service, Carvana offers consumers an intuitive and convenient online car buying and financing platform.

    Carvana.com enables consumers to quickly and easily shop more than 15,000 vehicles, finance, trade-in or sell their current vehicle to Carvana, sign contracts, and schedule as-soon-as-next-day delivery or pickup at one of Carvana’s patented, automated Car Vending Machines.

    CVNA appears to be positioned for a possible rally after a brief pullback.

    Carvana weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying CVNA could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

    A Specific Trade for CVNA

    Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For CVNA, the July 19 options allow a trader to gain exposure to the stock.

    A July 19 $65 call option can be bought for about $3.90 and the July 19 $70 call could be sold for about $2. This trade would cost $1.90 to open, or $190 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $190.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in CVNA the maximum gain is $310 ($70 – $65= $5; $5 – $1.90 = $3.10). This represents $310 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $190 to open this trade.

    That is a potential gain of about 63% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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