Glancing at the current financial picture for online used-car retailer Vroom (VRM), the situation doesn’t appear particularly encouraging. With expanding net losses amid a highly pressured consumer economic environment, many folks have thrown in the towel on VRM stock. Nevertheless, VRM shot up nearly 29% on the Friday, Aug. 5 session, possibly signifying that contrarian traders are hoping to spark a short squeeze.
To be fair, Vroom initially enjoyed a relevant business model. During the initial devastation of the COVID-19 pandemic, residents of major metropolitan areas that previously had easy access to robust public transportation networks suddenly found themselves shut out. Many pondered making their first car purchase in a long time – in some cases, for the first time ever.
However, with a mysterious and deadly pandemic raging, few wanted to interact with strangers within physical confines. Therefore, the concept of car delivery services aided the fundamental narrative for VRM stock, much like it did its direct competitor Carvana (CVNA). Browsing cars in the comfort and safety of their own homes, many people enjoyed – and were willing to pay the premium associated with – these direct-to-consumer automotive options.
Of course, with fading concerns of COVID-19 comes a reduced incentive to acquire vehicles through pricier delivery options. Still, Vroom may be able to maintain relevance by marketing the time-savings angle of said deliveries. With companies gradually demanding their employees return to the office, folks have less time overall to search for cars. Vroom can help fill the opportunity gap, thus aiding VRM stock.
Despite some positives for the company, conservative investors ought to maintain a vigilant profile.
VRM Stock Garnering Attention in the Options Market
Following the close of last Friday’s session, VRM stock was one of the top names associated with unusual options activity. Specifically, bullish traders piled into the $3 calls with an expiration date of Sept. 16, 2022. Volume reached 7,240 contracts against an open interest reading of 213.
Interestingly, trading activity for rival Carvana was also hot. Of note was the $60 calls with an expiration date of Aug. 19, 2022, with volume reaching 9,372 against an open interest reading of 749. Considering that CVNA stock needs to climb nearly 28% to be in the money – and only two weeks left until expiration – it’s an awfully risky wager.
However, before anyone decides to take a shot with VRM stock, traders should note that the $3 calls feature an extraordinarily wide bid-ask spread. As represented by the midpoint price (30 cents), the spread comes out to a startingly high 33.33%.
Two key assumptions are baked in here. First, volume for this trade is typically very low. Like an over-the-counter stock, participants will really need to be in the money to make a profit on a net basis. Second, the market maker for this transaction has little confidence in facilitating this trade with any degree of confidence.
True, VRM stock was up big on Friday but on a year-to-date basis, it’s down 79%.
The Short-Squeeze Angle
While it’s dangerous to maintain a long-term position in VRM stock, from a short-term angle, it might work out for speculators. As of July 15, 2022, VRM features a short percentage of float of nearly 22%. Usually, a ratio of 10% or higher signifies substantial bearishness.
Arguably, in most cases, stocks that feature a high short percentage will likely continue in their downward trajectory. If professional traders believe the underlying company is too fundamentally flawed, then it’s not usually a wise move to go contrarian for its own sake. However, the meme-stock phenomenon may have changed the rules somewhat. Thus, it’s not out of the question for VRM stock to swing higher for the next several days, perhaps weeks.
Also note that Vroom will release its second-quarter earnings report on Aug. 8 after market close. Any kind of positive news – or even “less bad” news – can help embolden speculators, meaning more intense interest for VRM stock.
One thing is for certain. At this juncture, it probably wouldn’t be a wise idea to short Vroom if indeed speculators are intent on sparking a short squeeze.
Stay on the Fundamentals
Nevertheless, at some point, the fundamentals almost always win out. In this case, soaring inflation implies that consumers will be looking for any way to cut costs. For car buyers, the best thing they can do is to eschew pricey conveniences for superior prices with traditional dealerships – or even private party.
True, millennials don’t really like haggling but with the consumer price index hitting 9.1% recently, desperate times call for desperate measures.
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