CarMax is currently trading at approximately 17 times its expected fiscal-year earnings of $3.16 per share, which aligns with its historical valuation. However, the used car market is facing significant challenges, particularly for middle-market consumers who are struggling with high prices and financing costs.
The average used auto loan annual percentage rate (APR) is 15.9%, with loan terms averaging 68 months, making monthly payments unaffordable for many buyers. Operational metrics indicate a slowdown in dealership performance, with longer cash conversion cycles and slower inventory turnover.
Given these conditions, while a major downturn in CarMax's stock is not anticipated, the potential for substantial upside is also limited. A suggested trading strategy involves a November hedged short strangle, which includes selling a $50 put and a $60 call while buying a $67.50 call for protection. This strategy could yield a net credit of about $2.30 per share, with defined risk parameters.
The ideal profit zone is between $50 and $60, where all options would expire worthless, allowing the investor to retain the full credit. The downside breakeven is set at $47.70, while the upside risk is capped at $5.20 above $67.50, providing a buffer against unexpected market movements