KMX | CarMax Inc Options Trade Idea
CarMax Inc., KMX, through its subsidiaries, operates as a retailer of used vehicles in the United States. The company operates in two segments, CarMax Sales Operations and CarMax Auto Finance. The company has Earnings on 6.21.2017. The company’s stock is currently trading around $60.05 in a 52 week range of $45.06-$69.11. The stock has been shown on fire over the past year with shares up 25.1% over the past 12 months. I think that the upside is in and KMX will sell off on Earnings. To confirm this signal we will analyze the stocks historical movement record on earnings, the current expectations for movement being priced into the options market, the technical setup, and institutional order flow into the event.
First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 2 times on earnings day with an average move of 4.7%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight negative bias in the performance of KMX on earnings day. This means that as we work through the rest of our analysis will have a bearish bias.
With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in KMX we will use the shortest dated options that still contain the catalyst event. In this case we will use the June 23rd weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the KMX $60 strike straddle in the June 23rd weekly expiry and it is implying a whopping $4.00 move.
The straddle is marking around $4.00. This implies an expected move of around $4.00. This implies a move of around 4.7% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup KMX
Upside target = $60 + $4.00= $64
Downside Target = $60 – $4.00 = $56
With these targets in mind we can look at the chart in KMX to see if trend agrees with the bullish bias, but I think the chart is top heavy in KMX price action.
Here we can see that the stock is trading above the Ichimoku Cloud and is firmly in bullish territory, but it has short term downside pressure
I think that KMX will move lower on Earnings, but I want to make sure I am getting a favorable reward to risk setup. I think the stock will move lower, but I am not sure how much
KMX Potential trade:
Buying 1 KMX June 23rd 62-58 Put Spread for $2.00 dedit
Risk: $200 per 1 lot
Reward: $200 per 1 lot
This kind of analysis can be used to find setups like this ahead of earnings and other catalyst events.
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