Options Trade – CarMax, Inc (NYSE:KMX) Calls
Thursday, April 03, 2014

**OPTIONS TRADE: Buy the KMX Jul 2014 50.000 call (KMX140719C00050000) at or under $1.85, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $3.50.

by Ian Harvey

April 03, 2014

Introduction

CarMax, Inc (NYSE: KMX) is scheduled to report fiscal fourth-quarter earnings before the open on Friday and is poised to beat the earnings estimate.

The company has fallen short of analysts' per-share profit projections in three of the past eight quarters, averaging a one-week post-earnings loss of 3.8%. KMX has spent the bulk of 2014 bouncing between support at $44.50 and resistance in the $49.50 region, and was last seen in the middle of this range at $47.61.

While Wall Street remains optimistic -- six out of eight analysts offer up "buy" or better ratings, with not a "sell" in sight -- short interest represents almost six sessions' worth of pent-up buying demand, at the stock's average daily trading volume.

Analysts have forecast earnings of 53 cents per share for the quarter, up from 46 cents during the same period last year -- and have now bumped it up to 54 cents per share. After showing strength in February, the stock has trended lower in March and is currently down 3.6% on the year.

Events are shaping up quite nicely for the KMX report due to the favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings—with the most up-to-date information possible—is a pretty good indicator of some favorable trends underneath the surface for KMX in this report.

Conclusion

A positive reading for the Earnings ESP has proven to be very powerful in producing both positive surprises, and outperforming the market. Given that KMX’s ESP is in positive territory, it is worth considering an options play ahead of earnings. Clearly, recent earnings estimate revisions suggest that good things are ahead for CarMax, and that a beat might be in the cards for the upcoming report.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the KMX Jul 2014 50.000 call (KMX140719C00050000) at or under $1.85, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $3.50.



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