- Shares of online used-car retailer Vroom was the subject of bullish unusual options activity.
- VRM stock has been one of the most disappointing investments this year.
- Betting on Vroom is incredibly contrarian, clashing against significant fundamental headwinds.
Back in June 2020, online used-car retailer Vroom (VRM) debuted in the public market to much fanfare. At the time, consumers feared the mysterious SARS-CoV-2 virus and therefore generally desired to limit public interactions. Fortuitously, Vroom’s relatively contact-free business enabled people to purchase their new-to-them rides while keeping infection risk to a minimum.
Not only that, the COVID-19 crisis inspired a surge in first-time car buyers. As you likely know, the pandemic created myriad shifts in how customers view personal transportation. In particular, people residing in major metropolitan areas that feature highly integrated public transportation networks suddenly saw the practical benefits of being sheltered in their own steel cocoon.
Unfortunately, the narrative for VRM stock quickly soured, especially as consumers gradually acclimated to the new normal. Later on, rising inflation imposed a significant headwind on Vroom and related companies like Carvana (CVNA). Essentially, online auto retailers must charge a premium for the conveniences rendered. Of course, premiums are anathema to the customer during inflationary cycles.
Therefore, it’s not terribly surprising that VRM stock has been one of the worst performers in the equities market this year. Since the beginning of January to the close of the July 11 session, shares plummeted 87%. You’d imagine that no one would want to place a long bet on VRM.
And you’d be quite wrong.
Unusual Options Activity for VRM Stock
Standing out within Barchart.com’s screener for unusual options activity was VRM stock. Specifically, traders bet heavily (the volume-to-open-interest ratio was 37.21) on 50-cent call options featuring an expiration date of Oct. 21, 2022. At the close of July 11, VRM finished at $1.44, meaning that these options are deep in the money.
For new participants, buying these calls really only makes sense if traders anticipate that VRM stock will move significantly higher from here on out. Interestingly, though, market makers don’t have as much confidence in such a scenario playing out. Relative to the midpoint price (98 cents), the bid-ask spread for this option is 15.3%, which is rather high compared to the spreads in other options-based transactions.
To quickly recap, market makers generally attempt to provide as narrow of a spread as possible. While a wider spread equates to greater profitability for these transactional facilitators (all other things being equal), going too wide makes them uncompetitive against other market makers. Therefore, a wider spread typically indicates less confidence in predictably placing the trade.
It’s no wonder that few want to engage VRM stock. Again, the equity unit has melted down 87% of market value this year, while hemorrhaging nearly 97% since its first public close. Is there any rational reason to bet on Vroom?
Quietly Making a Case for Itself
While past performance is no guarantee of future success, it is curiously intriguing that VRM stock’s recent price action belies its long-term negativity. In the trailing five days, shares are up 17% while over the past 30 days, they’ve gained a remarkable 35%.
Moreover, bearish sentiment is startingly high for VRM stock, suggesting that some traders are attempting to spark a short squeeze. As of June 15 of this year, the short percentage of float is nearly 30%. Usually, anything over 10% signifies substantial pessimism.
Is Vroom another meme stock waiting in the wings?
One factor to note is that the short ratio (or the number of days to cover a short position) is only 2.32, which suggests that the short-squeeze attempt isn’t quite a slam dunk. That said, bullish VRM traders may be looking at one game-changing fundamental factor.
According to The Wall Street Journal, the average age of vehicles on U.S. roadways hit a record 12.2 years. On one hand, this dynamic might be considered negative for VRM stock as it implies customers are doing everything they can to nurse their vehicles. On the other hand, cars can only be maintained for so long.
In other words, once they go, they’re gone. Plus, at some point, the economics of repairing a money pit makes less sense than buying a new or new-ish car.
High Stakes Poker
A notable feature of the 50-cent call options above is the expiration date. With 102 days till expiration as of this writing, traders are giving themselves some time to allow fundamental catalysts to swing in their favor. Therefore, VRM stock isn’t quite a wholly speculative transaction.
Nevertheless, prospective investors will want to exercise extreme caution. When a stock loses 87% of market value in a little over a half-year period, there’s a reason for it – and usually not a good one.
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