CarMax Inc. (NYSE: KMX) shares are trading higher this morning after the company reported a fourth-quarter profit of $21.8 million, or 10 cents per share. Excluding one-time charges, KMX earned 20 cents per share, beating analysts' predictions of 16 cents per share. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on KMX.
After hitting a one-year high of $27.42 in July, the stock hit a one-year low of $15.81 in January. KMX opened this morning at $19.09. So far today the stock has hit a low of $19.05 and a high of $20.70. As of 10:30, KMX is trading at $20.22, up $0.63 (3.2%). The chart for KMX looks bullish and steady.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just 7 weeks as long as KMX is above $15 at May expiration. KMX would have to fall by more than 28% before we would start to lose money. Learn more about this type of trade here.
KMX hasn't been below $15.80 at all in the past year and has shown support around $19 recently. This trade could be risky if the sluggish economy gets even worse, but even if that happens, this position should find support between $16 and $18, where the stock has bounced twice so far this year.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in KMX.
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