CarMax Options Traders Brace for a Volatility Crush

The car company is scheduled to report earnings before tomorrow's open

Jun 20, 2017 at 2:19 PM
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CarMax, Inc (KMX) is scheduled to report earnings ahead of tomorrow's open. While KMX shares have finished lower in the session subsequent to reporting in six of the past eight quarters, the two most recent earnings reactions have been positive. On average, CarMax stock has posted a single-session post-earnings move of 4.7%, regardless of direction, with the options market pricing in a much bigger swing of 10.9% for tomorrow's trading.

Options traders have been active in the lead up to tomorrow's earnings report, with total KMX open interest at its highest point since late April. There are currently 107,550 calls open on KMX -- in the 95th annual percentile -- compared to 81,732 puts, a 52-week peak. 

KMX's top open interest position is the July 57.50 call, where 26,497 contracts reside, the bulk of which were initiated in early April when the stock was trading around $56.50. More recent -- and likely earnings-related -- action involves a four-way spread using 16,000 short 57.50-strike puts, 8,000 short 65.50-calls, and 8,000 long 55-strike puts in the weekly 6/23 series, along with 8,000 long 60-strike puts in the weekly 6/30 series, which was initiated yesterday.

Options traders are blitzing KMX stock today, too, with nearly 39,000 contracts traded -- six times what's typically seen. Calls are outpacing puts by a more than 2-to-1 ratio, and it looks like a number of speculators are looking to take advantage of elevated implied volatility levels. 

Specifically, the out-of-the-money July 65 call is most active with around 6,0000 contracts on the tape so far. Options traders may selling to open the calls, betting on $65 to serve as a ceiling for CarMax over the next four weeks. It's also possible they're hoping for a post-earnings volatility crush. At last check, KMX's 30-day at-the-money implied volatility was docked at 40.3% -- just 5 percentage points from a 52-week peak.

Technically, KMX hasn't closed north of $65 since May 22, and has been in a channel of lower highs and lows since. Today, CarMax shares are down 2.9% at $59.86 to test their recently supportive 200-day moving average. Longer term, the stock has surrendered 7.1% in 2017.

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