KMX, CLF, WAG Options — Unusual Trading Activity — September 7, 2012

| September 7, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in CarMax (KMX), Cliffs Natural Resources (CLF), and Walgreens (WAG).

As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.

This is something professional options traders pay a lot of attention to, and for good reason…

Unusual options activity can “tip off” big moves in a stock, either up or down.

So let’s take a look at some ‘interesting’ activity that caught our eye this week:

CarMax (KMX) Options

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 dealer.

It’ll be interesting to see if they’re right!

Cliffs Natural Resources (CLF) Options

Options in iron ore company Cliffs Natural Resources (CLF) showed an unusual trade on the bullish side at the end of Tuesday’s trading session.  

CLF has been getting beaten down over the last several months with no reprieve.  The stock has gone from $60 per share to a low this morning of around $32 a share before rebounding slightly.

But at least one trader is calling a bottom here? 

Puts dominated yesterday’s option activity in Cliffs Natural Resources as its shares traded at their lowest levels since 2009.

At the close Tuesday, CLF was down 3.8% to $34.45.  The iron ore producer has lost half of its value in the last four months and is now back at levels from November 2009.

So, what’s this option trader thinking calling the bottom on this falling knife?

According to our tracking system, a trader sold 1,000 CLF September $37 strike put options for $2.18.  At the same time, the trader bought 1,000 CLF September $36 puts for an ask price of $1.45 at 5 times the open interest at that strike.  

This indicates a new opening credit spread position.

In other words, this trader collected a total of $73,000 which he will pocket as long as CLF remains above $37 until September expiration.

Not a bad return for six weeks!

Now, what’s the story here?

Cliffs Natural Resources is the largest producer of iron ore in North America.

The company operates mines in the United States and Canada that supply nearly 50% of North American blast furnace demand.

CLF also owns two iron ore mines in Australia and has a minority stake in an iron ore asset in Brazil. In addition to iron ore, Cliffs operates several coal mines in the US as well as a large chromite (another substitution for aluminum) project in Canada.

It sounds good… what else is contributing to this trader’s bullish position?

For one, in the event Chinese steel consumption continues to grow at healthy rates, it will be difficult for global supplies of iron ore to keep up, setting the stage for an extended period of abnormally high prices.

In addition to the Bloom Lake and the renegotiation of pricing mechanisms with the US, customers will afford proportionally greater exposure to the seaborne market, allowing Cliffs to capitalize on a “stronger for longer” investment boom in iron ore-hungry China.  Obviously this new pricing will contribute to top line revenue.

Lastly, Cliffs has an attractive growth profile, driven largely by a two-phase expansion of their Bloom Lake project. 

It’s a real surprise that with all these positive reasons, CLF’s stock price is not substantially higher.

Let’s see if this bottom calling will turn into large profits.

Walgreen Options (WAG)

Options in drugstore chain Walgreen (WAG) experienced a large amount of unusual trading activity Wednesday.

Walgreen’s stock was up slightly Tuesday but is down 1.5% to $35.31 this morning.

I think this comes on the heels of all of the consolidation lately amongst the big drug companies… including a fear that Express Scripts (ESRX) will wind up costing Walgreen’s a good amount of market share.

However, option traders are treating the pullback as a buying opportunity.

I think traders believe WAG offers unmatched convenience, a highly recognized brand name, and outstanding customer service compared to other drugstore chains.

And that’s why this large call option trade.

Tuesday afternoon, a few traders came in and purchased the WAG October $36 strike call options at an average price of $0.80.

There were several large block trades that added up to around 15,000 contracts.  Now, that’s a hefty amount.

This puts the total wager on WAG stock going higher by October expiration at $1,200,000.

And don’t forget… since these are straight call options, the upside potential here is unlimited.  You can bet these traders would like to see this stock at $45 or $50 per share!

So, let’s take a look at a little history.

As you probably know, Walgreen’s operates a chain of drugstores in the United States. It sells prescription and non-prescription drugs as well as an array of general merchandise and household products.

In addition, WAG operates in-store and work-site health clinics.

I think this, as well as other positive news, is what has option traders so excited.

Walgreen’s slowing store growth should result in higher margins moving forward… as new stores often post losses in their first year and mature stores have operating margins considerably higher than the overall company.

In addition, health care spending growth, the aging population, and the generics wave provide secular tailwinds that boost Walgreen’s results.  These trends should increase top line growth going forward.

Lastly, WAG could have a huge new opportunity in work-site and in-store health clinics.  These services can provide basic care more cheaply than doctor’s offices and hospitals.

What’s more, these clinics also have the potential to increase store traffic and prescription volumes.

Bottom line…

Option traders think October’s expiration is going to be a very lucrative one for Walgreen calls.  We’ll see.

More Options Ideas…

That wraps up this week’s unusual options trading and volume….

Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.

We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!

So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!

Safe Trading,

Marcus Haber

Tags: , , , , , , , , , , , , , , , , , , , ,

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.