Trade of the Week: Carvana

Earnings provide opportunities for outside moves and as volatility expands, I like to call this ‘butterfly season'.  And though I normally put both sides of the trade for bullish and bearish stances, today I will sit on one side of the trade with Carvana 

Today's post earnings trade comes to us from CARVANA ($CVNA) 

The premise is the following – over the next 45 days, we expect to see the stock move away from its current location – in a general mean reversion trade back into the moving averages below. 

Trade structure 

The long put butterfly  

A long put butterfly is positioned so the ‘long wing' of the trade give us a likelihood of returns, while using the short wing to finance part of the trade. 

The long put butterfly- this is a long put spread (a bearish position) and a short put spread (a bullish position) that share the middle strike. 

Buy to open 1 CVNA 20 SEP 110 puts 

Sell to open 2 CVNA 20 SEP 100 puts 

Buy to open 1 CVNA 20 SEP 90 puts 

The put butterfly above will cost $1.29 (the max loss for this position) which makes the max profit $8.71(outside of commissions).  Total profits will begin to erode if the price of $CVNA stays below $100 

The strategy result provides three choices to exit the trade. 

1. To sell the entire butterfly spread once the middle strike of either spread is tested – that means we look at setting an alert for $100 

2. To sell the spread once it hits your loss threshold as determined by personal risk.- this will happen with extreme movement. 

3. To sell the spread into the week before expiration, if all is going well and you have decided to hold the trade into closer to the end of expiration (I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this) 

If you want the same Research Platform I use you can Get 50% Off Benzinga Pro for a Limited Time Here!

• Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.” She writes for Benzinga as well as a variety of stock and options media outlets.. You can find her on X at @AnneMarieTrades  

Photo via Shutterstock.