Embattled Vroom (VRM) Tops the Screener for Unusual Options Volume

By almost every measure, used-car retailer Vroom (VRM) – which garnered the most attention for its online business model – looks like an enterprise to avoid at all costs. At one point in the summer of 2020, VRM stock traded hands on a weekly average basis for over $61. Today, it’s barely above $1. Yet at the same time, it topped Monday’s screener for unusual options volume.

Fundamentally, Vroom may have suffered from the overexuberance of investors banking on the COVID-19 crisis imparting near-permanent social changes. As the Wall Street Journal pointed out, during the worst of the pandemic, people living in the east coast bought their first car, either for the first time in a long time or ever. Naturally, the alternative – sitting among strangers in public transportation systems – was too unappealing.

At the time of the aforementioned WSJ article in early July 2020, VRM stock enjoyed a price tag of roughly $50. In hindsight, its best day was less than two months away. As people gradually acclimated to the pandemic, the need to pay a premium for used-car deliveries diminished.

However, irrespective of the global health crisis, VRM stock initially benefitted from another upside catalyst: most folks don’t like to deal with the high-stress environment of negotiating in auto dealerships. With Vroom completely taking this undesirable experience off the table, it appealed to a large audience despite the associated convenience premium.

Unfortunately for VRM stock, the dramatic rise of inflation last year gutted consumer sentiment. At that point, Vroom faced a double headwind: it lost the cynical incentive that the COVID-19 crisis sparked regarding auto sales and it also suffered from consumers losing their inhibitions about hardball negotiations amid sharply escalating prices.

As the market penalized VRM stock, some traders likely saw a speculative opportunity in shares, if only to bank on a dead-cat bounce. While this might explain the activity in the derivatives market, most investors should steer clear.

VRM Stock Is Monday’s King of Unusual Options Volume

At the close of the Jan. 30 session, VRM stock topped the highlights for Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Typically, traders leverage this data to determine which stocks may be due for big moves ahead.

Specifically, VRM’s volume level reached 97,083 contracts against an open interest reading of 178,764. Call volume hit 95,900 contracts versus put volume of 1,183. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 1,209.46%. The implied volatility (IV) rank hit 35.46%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for VRM stock was 96.01% on Dec. 12, 2022. Mere days later on Dec. 27, VRM hit its IV high of 233.83%. Prospective investors should note that per Barchart.com’s technical analysis gauge, VRM ranks as an average 72% sell. Only in the short-term indicators does modest bullish sentiment exist; otherwise, it’s all red ink.

Surprisingly, analyst sentiment ranks middle of the pack. Three months ago, Wall Street experts pegged VRM stock a “hold,” breaking down as one strong buy, six holds and one strong sell. In the current month, the consensus remains the same. As for the breakdown, one expert still rates VRM as a strong buy while the remaining seven others view it as a hold.

Finally, VRM’s 60-month beta sits at 1.61, reflecting much higher volatility than the benchmark equities index. If anything, the beta seemingly should be much higher given the trailing “lifetime” loss of 97.5%. However, recent bullishness may have spared (some) blushes.

Can Short-Squeeze Speculation Lift Vroom?

While automotive-related securities suffered some of the worst damage last year, in the new year, circumstances appear at least temporarily auspicious. In particular, speculative fervor increased, either based on supposedly cheapened valuations or because market gamblers anticipate another round of short-squeeze plays. From this context, it’s understandable why VRM stock attracts attention.

Admittedly, elevated bearish indicators suggest a temporary sentiment reversal may blossom. For instance, Fintel notes that the short interest of VRM stock hit 15.30% of float while the short interest ratio pinged at 6.8 days to cover. Moreover, Fintel states that Vroom’s Short Squeeze Score is 76.53, indicating higher risk of a short squeeze relative to its peers.\

Finally, the investment resource indicates that the number of shares available to be shorted at a leading prime brokerage is only 1,000 as of 36 minutes prior to the time of this writing.

Nevertheless, I would be extremely cautious about bidding up VRM stock because it comes down to the fundamentals. With a distressed balance sheet and negative profit margins, Vroom faces troubling economic circumstances with its back to the wall.

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