Yet another deep in the money call - KMX

KMX, carmax, the used car dealership is going through challenging times but it is generally a profitable business. Here I have shared some thoughts on KMX.

Today I wrote a covered call, I bought the stock $68.68 and sold Jan 24 $40 strike for 32.48, this is a deep in the money call, providing 47% downside protection, giving me net price of $36.2 and an annualized yield of 11.59% or simple return of 10.47%.

While the company deals with economy, inventory, increasing delinquency and we find what is the new per unit economics, this deep call gives you plenty of downside protection. If for some reason, this is the bottom for the stock price, which I doubt but was wrong multiple times in the past, I get at least 10% return.

Between carrying cash (where the brokerage sweep pays .01%) for nothing, or take a market risk (it is not clear where we are with the recession, how many rate hikes Fed is planning), I am settling to deploy some of the cash in covered call on multiple names in my IRA account.

1 Like

The stock bottomed in march 23rd @55. The used car price has moved back up and now again slowly, ever so slowly, moving down. Still a long way from getting back to trend line or mean-revert. In the meantime the stock price performance is much better. If I close I could capture little over 5% return, will wait.