CarMax (KMX) Options: Unusual Trading Activity

| September 4, 2012 | 0 Comments

KMX OptionsOptions 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!

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.