KMX Analysis

CarMax Inc. (KMX)

Update 12/21/2017: KMX underperformed the Street estimate of its earnings by $3.1%, coming in at 81 cents per share compared to the consensus forecast of 83.56 cents per share. The price gyrated wildly in overnight trading, spiking up nearly $2 then undergoing two wide swings, ending up after the opening bell around $3 below the prior day’s close.

Shares declined by 2.7% during my holding period of less than a day, or a -988% annual rate. The options position produced a 366.9% return for a +133,833% annual rate.

The metrics performed as expected. 

The Zacks earnings surprise predictor (ESP) showed a negative surprise, which is what happened, in the context of a neutral (3) rank. The Zacks ESP has a poor record in forecasting negative earnings surprises and yet performed well in this instance.

The trend metrics showed a strong downtrend through a reversal of the directional indictators (+DI at 19.57 vs. -DI at 27.43), with the average directional index (ADX) at a powerful 30.6, indicating a strong trend. And indeed the price fell post-earns.

The movement from pre-earns close to post-earns close stayed within the average of the last four earnings announcement, dropping -2.47 compared to an average magnitude of 2.74.

At the extreme, the movement from pre-earns close to post-earns low came close to the estimate of $3.57, exceeding it by 9 cents, to -$3.66

There was strong consistency among the metrics used to assess this trade, and my takeaway is that I should reject trades that lack such consistency.

KMX publishes earnings on Thursday before the opening bell.

I shall use options that trade for the last time nine days hence, on Dec. 29.

Implied volatility stands at 33%, which is 3.4 times the VIX, a measure of the volatility of the S&P 500 index.

KMX’s IV stands in the 44th percentile of its annual range and the 77th percentile of its most recent broad movement.

The price used for analysis was $68.37. KMX has a slight chance of a negative earnings surprise amidst a weakening downtrend. I shall structure the position as a bear call vertical spread.

Premium: $0.70 Expire OTM
KMX-bear call spread Strike Odds Delta
Long 73.50 84.4% 36
Break-even 71.20 71.5% 27
Short 70.50 73.5% 17

The premium is 46.7% of the width of the position’s wings.

The risk/reward ratio is 3.3:1.

The zone of profit in the proposed trade covers a $2.85 move to the upside from the at-the-money point of $68.35 and infinitely to the downside. The biggest immediate move after each of the past four earnings announcements was $5.35, and the average was $2.74. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.57.

The expected move covering 85% of occurrences is $3.57, within the profit zone to the downside but wider than the upside zone.

The bid/ask spread is 33.3%.

Decision for My Account

I have entered a position on KMX as described above. The stock at the time of entry was priced at $68.35.

By Tim Bovee, Portland, Oregon, Dec. 20, 2017


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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