🕒 Market Overview: CarMax missed earnings by 38% as credit losses exploded across auto finance sector

🔄 Sector Insight: Auto loan rates hit 14.15% while Fed cuts rates, signaling massive risk repricing

💰 Today's Trade Idea: Bear Put Spread on CVNA targets overvalued high-flyer amid sector stress

SMART TRADE IDEA

Bear Put Spread on CVNA

Trade Setup:  Buy $250 Put / Sell $200 Put, February 20, 2026 expiration.

• Cost:  $7.50 ($750 per spread)

• Max Profit:  $42.50 ($4,250 per spread)

• Breakeven:  $242.50

Management Plan:   Exit at 50% loss, roll down, or take profits if CVNA’s price reaches $210 before expiration.

CVNA shares more than doubled from the end of 2024 to the July 2025 high. While CVNA’s trend remains bullish, the latest Carmax earnings could indicate that a substantial downside correction is on the horizon for CVNA. CVNA’s share price is over 33% above the upper strike price of the $250-$200 bear put spread, with approximately five months until expiration. Carmax shares have plummeted more than 36% since July 2025, in just over two months. CVNA’s sky-high P/E will require a significant earnings beat on October 31, which the current credit environment may not support. 

NOTE: Remember, options trading involves substantial risk and is not suitable for all investors. Consider your investment objectives, financial resources, and experience level before implementing this or any options strategy.

DISCLOSURE: Trade recommendations may have changed since publication. Evaluate current market prices and risk/reward before acting. Trading involves significant risk and is not suitable for everyone. This is not personalized investment advice. Past performance doesn't guarantee future results. Publisher and contributors may hold positions in recommended securities. Readers assume full responsibility for their trading decisions. Consult a financial professional before investing.

MARKET BREAKDOWN

Macro Lens – Big Picture Market Forces

The automotive finance sector faces a reckoning that extends far beyond CarMax's spectacular earnings miss. Credit deterioration is accelerating as used car loan rates climb to 14.15% despite Federal Reserve rate cuts, revealing fundamental risk repricing across the industry. Consumer sentiment has plummeted 14.3% year-over-year to 58.0, creating a toxic environment where borrowers struggle with payments while dealers face inventory challenges.

The macro picture shows troubling parallels to previous credit cycles. Industry data reveals 53% of used vehicle loans now exceed 120% loan-to-value ratios, up from 38% three years ago. When more than half of borrowers owe more than their vehicles are worth, the sector creates conditions for sustained stress. Rising unemployment combined with tightening credit standards threatens to compress demand across both new and used vehicle markets.

Sector and Stock Watch – Identifying Key Movers

CarMax's $71.3 million increase in estimated lifetime losses on existing loans signals broader industry problems. Loans originated during 2022-2023 "stable" conditions are failing dramatically, raising questions about underwriting standards across the sector. The immediate contagion spread to AutoNation and Carvana, both declining 4% in sympathy, while traditional dealers like Group 1 Automotive dropped 2%.

Carvana presents the most compelling risk case. Trading above $374 per share with a P/E ratio exceeding 90 times earnings, the stock has rallied from $3.55 in December 2022 to recent highs near $413. This parabolic move occurred during the same period when industry fundamentals were deteriorating. The company's high valuation multiple leaves little room for error as credit conditions tighten and competition intensifies.

Trading Strategy in Focus – How to Play the Market

Current market conditions favor strategies that profit from downside moves while managing risk through defined parameters. Bear put spreads offer attractive risk-reward profiles in overvalued names with fundamental headwinds. The strategy benefits from price declines while limiting maximum loss exposure, making it suitable for volatile credit-sensitive sectors.

The automotive finance sector's interconnected nature creates opportunities for targeted trades against the most vulnerable companies. High-multiple stocks with exposure to subprime lending face dual pressure from both earnings disappointments and multiple compression. Technical support levels provide logical targets for bearish strategies with sufficient time to develop.

There are signs that the economy could weaken over the coming months. While the Fed is lowering interest rates, the path lower has been slow and perhaps too late. As unemployment rises, credit may become increasingly tight, which in turn affects demand for both new and used automobiles. Carmax (KMX) shares, trading under $46, have already plunged to the lowest level since the pandemic-inspired $37.59 low from March 2020, following the latest earnings, pushing the P/E ratio far below the average of the S&P 500. Carvana (CVNA) has been a high-flying stock. At over $370 per share, CVNA’s P/E ratio is sky-high at over 90 times earnings. While the trend is bullish, the recent action in Carmax shares could have a significant impact on CVNA.

The chart illustrates the remarkable rally from the $3.55 per share low in December 2022 to the most recent high in July 2025 of $413.33. At over $374, CVNA could have substantial downside potential in the current environment. CVNA’s technical support is below the $150 level, at the April 2025 low of $148.25.

The February 20, 2026, $250 - $200 vertical bear put spread has an attractive risk-reward ratio of over 1:5 at $7.50 per spread.  

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