Caution reigns before CarMax reports

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CarMax is stalling near an all-time high, and traders are getting nervous before earnings come out tomorrow morning.


optionMONSTER's Depth Charge monitoring program detected the purchase of 3,000 October 50 puts for $1.50 and the sale of an equal number of October 45 puts for $0.20. Volume was more than 5 times open interest at each strike, indicating that new positions were opened.

Owning puts fixes the price where shares can be sold in the automobile retailer while selling them creates a buy order. Combining the two strategies essentially results in a short trade between $50 and $45. It cost $1.30 to enter and will earn a maximum profit of 285 percent on a drop to the bottom of the range or lower. (See our Education for more on the trade, known as a bearish put spread .)

KMX is down 1 percent to $50.68 in afternoon trading but is up more than 70 percent in the last year as an improving economy lifts car demand. The stock peaked above $52 earlier in the month and has been drifting lower since.

Overall option volume is 23 times greater than average so far in the session, with puts accounting for a bearish 88 percent of the float.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.



This article appears in: Investing , Options

Referenced Stocks: KMX

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