2 Reasons to Buy the Dip on Struggling Carvana Stock

Carvana Co (NYSE:CVNA) stock is down 7.6% to trade at $64.71 today, weighed down by CarMax's (KMX) earnings report that detailed used-car market softness and subprime auto risks. Despite a 23% year to date deficit, CVNA is flashing a historically bullish signal in its options pits.

Carvana sports a 10-day put/call volume ratio of 2.08 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) that stands higher than 94% of readings from the past year.

This marks the 10th time in the last three years that the equity's 10-day buy-to-open put/call ratio crossed over 1.0 and hit the 90th percentile. Per Schaeffer's Senior Quantitative Analyst Rocky White, CVNA was higher one month later 70% of the time after these signals with an average 24.4% return. From its current perch, this would put the stock back above its year-to-date breakeven level and pad its 10.3% year-over-year deficit. 

Short squeeze potential is worth watching as well. Short interest has started to taper off in the most recent reporting period, yet the 72.22 million shares sold short account for 11.6% of the stock's total available float. At CVNA's average pace of trading, it would take shorts over five trading days to buy back their bearish bets.

Options look like an attractive route. Carvana's Schaeffer's Volatility Index (SVI) sits in the 22nd percentile of its annual rage In other words, near-term option traders are pricing in relatively low volatility expectations.