Taking volatility for a test drive

  • CVNA down more than 90% from last year’s record high
  • Implied volatility high on Tuesday, earnings due in 2 weeks
  • Stock bounced after testing four-year lows last week

Even though the market has managed to zigzag slightly higher over the past couple of weeks, there’s no shortage of growth, tech, and pandemic-era stocks trading at steep discounts to their 2021 highs.

For example, used-car retailer Carvana (CVNA)—which at one point last year was up around 1,160% from its March 2020 low—had one of the highest options implied volatility (IV) levels among individual stocks on Tuesday:

Chart 1: LiveAction scan: Highest 30-day IV, 7/19/22. Unusual options activity. High options volatility.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

That could be partially a result of the company’s upcoming earnings release (currently scheduled for August 4), but the stock’s price volatility probably had something to do with it, too. After peaking around $370 in August 2021, CVNA had lost 95% of its value when it hit $19.45 last week:

Chart 2: Carvana (CVNA), 2/21/20–7/19/22. Carvana (CVNA) price chart. Below March 2020 lows.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

While the scale of the chart may make it look as if CVNA has been consolidating for more than a month, that hasn’t been the case. In just the past 12 days, prices have swung as high as $28 in addition to falling below $20. In fact, yesterday the stock was down as much as 9% intraday before rebounding into positive territory, bringing CVNA’s three-day gain to around 10%:

Chart 3: Carvana (CVNA), 7/1/22–7/19/22. Carvana (CVNA) price chart. Testing lows.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

One of the cardinal rules for options trading is to keep in mind the connection between high IV and high options prices. Formerly high-flying stocks trading near their all-time lows will often attract bargain hunters, both traders and longer-term investors. While the latter will often simply buy the stock (or execute a “buy-write” trade), traders who want to use options always need to be on guard against buying options that may be relatively overpriced—because of high IV—even if the stock isn’t. If the stock rallies and IV declines (which often happens in an oversold market), a call option may gain value because of the price rise, but it may also lose some value because of falling IV.

That doesn’t mean those interested in a stock’s upside can’t trade options, just that they may, depending on the circumstances, consider selling potentially overpriced put options (or using a bull put spread) instead of buying calls.

Today’s numbers include (all times ET): MBA Mortgage Applications (7 a.m.), Existing Home Sales (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Tesla (TSLA), Baker Hughes (BKR), Abbott Laboratories (ABT), CSX (CSX), United Airlines (UAL), Crown Castle International (CCI), Alcoa (AA), Kinder Morgan (KMI).


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