In the June 2017 announcement, earnings were a whopping 23% above estimates, but the stock only gained 4% after they became public. In the next quarter, September 2017, earnings exceeded estimates by only 3% while the stock gained 10%.
KMX does not seem consistently beat or fall behind estimates. This is a different pattern than we see in many companies who low-ball guidance, and then exceed estimates by a large amount quarter after quarter. KMX does not seem to do this.
The average post-announcement stock price change for KMX was 4.9%. This is less than the current option prices which have priced in a likely 5.7% change.
Someone who likes the stock might take advantage of the higher option prices and write an out-of-the-money call against their stock, and collect some nice premium in addition to some price appreciation if the stock manages to move higher.
We do not have a strong feeling concerning which way we feel the stock is headed after next week’s announcement other than that we think it will probably go in the same direction as the actual results compared to estimates. Since there is no clear pattern of how well the company does compared to estimates, this leaves us with a neutral position on the direction the stock might take after the announcement.
We have developed what we call the Diagonal Condor Earnings Strategy as our preferred options play prior to announcements.
Based on our neutral outlook on KMX, these are the spreads we placed for the upcoming announcement:
Buy to Open KMX 11May18 58 puts (KMX180511P58)
Sell to Open KMX 06Apr18 61 puts (KMX180406P61) for a credit of $.08 (buying a diagonal)
Buy to Open KMX 11May18 67 calls (KMX180511C67)
Sell to Open KMX 06Apr18 64 calls (KMX180406C64) for a credit of $.08 (buying a diagonal)
The net maintenance requirement (investment) on these spreads is $294 per pair ($300 - $16 plus $10 commission), and we have a net credit of $6 per pair in the account.
This is what the risk profile graph looks like after the market close on April 6, assuming that implied volatility (IV) of the May options falls by 3, from the current 33 to 30 (which is consistent with prior earnings week IV drops for 5-week-out options).
