CarMax (KMX) Options: Unusual Trading Activity
Options in car dealer company CarMax (KMX) experienced an unusual change in sentiment in Friday afternoon’s session.
While the total CBOE option volume was unusually light on the day, professional traders did begin to place bets before the long holiday weekend.
What’s going on?
CarMax has been rallying for the last two months. In fact, the shares are up by a stunning 23% since late June.
However, options traders are beginning to question this large run. And a few are even turning bearish on the name.
Before KMX closed Friday with a slight gain at $30.59 per share, some traders came in and placed large bets on the bearish side. In fact, our tracking system detected a January 2013 put spread on KMX.
One trader bought 1,700 KMX January $30 strike put options for $2.30 and sold the same number of KMX January $24 strike put options for $0.55.
So, what’s the story here?
For those of you who don’t know, CarMax sells, finances, and services used and new cars through a chain of over 110 retail stores.
It was formed in 1993 as a unit of Circuit City and was spun off into an independent company in late 2002.
Their used-car sales account for nearly 80% of revenue and new cars account for 2%, the remaining portion is composed of wholesale, financing, and repair.
As a matter of fact, in fiscal 2012, the company retailed and wholesaled 408,080 and 316,649 used vehicles respectively.
It sounds good… but there are reasons to be concerned.
For one, CarMax operates in a cyclical industry, and its business model is not immune to recession. If global growth continues to slow, revenue could decline dramatically.
Second, KMX is dependent on continuous sales. And the repeat business that management expects from the three- to five-year vehicle purchasing cycle is not a sure thing.
Finally, generous discounting of new vehicles by automakers could hurt demand for used vehicles. In turn, this could have a negative impact on the company’s revenue stream.
It seems quite clear that all of these uncertainties have a few option traders betting against KMX. They obviously believe the next few months could spell trouble for the used car auto dealer.
It’ll be interesting to see if they’re right!
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
