Pre-Earnings Options Traders Take Action on Crashing CarMax Stock

CarMax stock is getting hammered due to a negative Barron's write-up, and call options volume is at an annual high

Apr 3, 2017 at 3:25 PM
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CarMax stock is tumbling today -- trading down 4.3% at $56.65, and one of the biggest percentage decliners on the S&P 500 Index (SPX) -- following a bearish note in Barron's, and as disappointing March vehicle sales weigh on auto stocks. Specifically, Barron's said KMX stock (subscription required) could drop 20%, should the company's fourth-quarter earnings, due ahead of Thursday's open, disappoint. Nevertheless, more than 66,000 calls have been traded in KMX's options pits, 16 times the average intraday pace and a new 52-week peak. 

Diving deeper, the bulk of the options activity is the result of a bullish roll-down in the front-month series. According to Trade-Alert, one speculator sold to close a 28,696-contract lot of April 62.50 calls, while simultaneously buying to open a block of 17,217 April 60 calls. If this is the case, the options trader is lowering her outlook amid KMX's recent decline, but is still expecting the stock to stage a post-earnings surge.

More broadly speaking, today's call-heavy options trading echoes the recent trend toward KMX. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 2.79 ranks in the 84th annual percentile. In other words, calls have been bought to open over puts at a quicker-than-usual clip.

Plus, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.17 ranks lower than 91% of all comparable readings taken in the past year, meaning short-term speculators have rarely been as call-skewed as they are now. Across all options series, KMX call open interest is docked at an annual high, with 91,390 contracts outstanding -- nearly 45% of which resides at the April 62.50 strike.

It's certainly possible that some of this call buying came at the hands of short sellers hedging their bearish bets, considering 11.9% of KMX's float is sold short. Regardless of the reason, it's getting pricey to purchase pre-earnings premium on the stock's near-term options. In fact, KMX stock's 30-day at-the-money implied volatility of 47.9% is docked just 2 percentage points from a 52-week peak.

Technically speaking, CarMax  shares have been in free fall since topping out at an annual high of $69.11 in mid-February, down 18%. As for the stock's earnings history, it's averaged an absolute move of 5.5% in the session after the event, going back eight quarters -- with three-quarters resolving to the downside. This time around, the options market is pricing in a much bigger move of 10.4% for Thursday's session. 

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