Hindenburg Bows Out
Last month, Nate Anderson, the founder of the famous short sellers Hindenburg Research, announced his decision to close shop. A couple of weeks earlier, his firm had announced what appears to have been its last short position, a bet against Carvana, Co. CVNA.
In the first two posts of their fifty-one post X thread, Hindenburg described Carvana as “a father-son grift for the ages” and a “$44 billion online car dealer founded in 2012.”
Today it’s a $60 billion online car dealer, and we exited a bullish bet on it for a 193% gain. Here’s how.
The Gist Of Hindenburg’s Bearish Thesis
The gist of Hindenburg’s bearish thesis was that some past accounting irregularities at the company might jeopardize the company’s ability to get financing in the future. The day after Hindenburg’s short call, on January 3rd, the stock dropped 11.22%, to close at $177.16.
Why We Were Bullish On Carvana On January 7th
Two reasons.
The first was Carvana was a Portfolio Armor top ten name. Since December of 2022, our top ten names have returned 19.55%, on average, over the next six months, versus an average of 12.45% for the SPDR S&P 500 Trust (SPY).
And the second reason was that the day before, Hindenburg’s bearish thesis had been effectively invalidated, when Ally Financial, Inc. ALLY renewed its financing deal with the company.
We mentioned both of those factors in our trade alert on January 7th:
Structuring The Trade
Since the next catalyst on the calendar was Carvana’s earnings release on February 19th, we looked at the closest options expiration date after that, which was February 21st. To avoid implied volatility crush, we decided to use a vertical call spread. We looked at both Portfolio Armor’s expected return for CVNA, as well as the at-the-money straddle before selecting strike prices.
The trade we settled on was a vertical spread expiring on February 21st, buying the $220 strike calls, and selling the $230 strike calls. We entered that trade for a net debit of $3.32 on January 7th.
Exiting The Trade
The maximum possible gain on a vertical spread like this is the difference between the strikes. In this case: $230 – $220 = $10. That occurs when the stock is trading above your higher strike, close to expiration. That’s when your short call leg (the one you have to buy back) has the least time value.
We held the trade through Carvana’s earnings report after the close on Wednesday. The stock dropped about 12% after its earnings miss, but it was still well above our higher strike on Thursday morning. We ended up exiting at a net credit of $9.74, for a 193% gain.
- Call spread on Carvana (CVNA 3.52%↑). Entered at a net debit of $3.32 on 1/7/2025; exited at a net credit of $9.74 on 2/20/2025. Profit: 193%.
The Takeaway
Trading doesn’t have to be complicated. Our bullish thesis on Carvana was a lot shorter than Hindenburg’s bearish thesis:
- A reliable indicator (our system’s top ten names) was bullish on Carvana.
- Ally Financial renewing Carvana’s financing deal invalidated Hindenburg’s short thesis.
If you would like a heads up when we enter our next trade, you can sign up to our trading Substack/occasional email list below. And if you want to add some downside protection here, you can download the Portfolio Armor optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you’re reading this on your phone).
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