Skepticism Could Drive CarMax Stock Higher

Low volatility expectations are being priced into KMX's short-term options

Jul 18, 2017 at 12:13 PM
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Used car retailer CarMax, Inc (NYSE:KMX) has been making a series of higher highs and lows since early 2016. After hitting an annual high north of $69 in mid-February, the shares pulled back sharply over the next two months, but have since resumed their longer-term uptrend. KMX is now trading back above its year-to-date breakeven mark, which could help support the stock going forward.


There's plenty of skepticism to be unwound toward a stock that maintains a more than 16% year-over-year lead. KMX's 10-day put/call volume ratio across the major options exchanges is perched at a top-heavy 5.16 -- in the 94th annual percentile.

The stock is heavily shorted, too, with 14.9% of its float dedicated to these bearish bets, or 6.3 times the average daily trading volume. A capitulation from some of the weaker bearish hands both in and out of the options pits could translate into tailwinds for KMX.

It's also good time to target KMX options, based on the stock's Schaeffer's Volatility Index (SVI) of 30%, which ranks lower than 84% of comparable readings taken in the past year. In other words, low volatility expectations are being priced into the equity's short-term options.

Finally, our recommended call option has a leverage ratio of 6.0, and will double in value on a 16.1% move in the underlying security.

Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this KMX commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.


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