The used car market is stagnant. Here's how to profit anyway
Michael Khouw breaks down this short strangle options trade.
TL;DR
- CarMax stock valuation appears reasonable, trading at its 10-year historical forward multiple.
- High used auto loan APRs (15.9%) and financing headwinds are impacting used car affordability.
- Operational metrics like cash conversion cycle and inventory turnover show negative impacts.
- A catalyst for an auto sales boom is absent due to persistent high borrowing rates.
- A proposed strategy involves selling a November hedged short strangle to profit from a range-bound stock.
- The strategy aims to collect a net credit of $2.30/share if the stock is between $50 and $60 at expiration.
- The hedged short strangle caps the maximum upside risk to $5.20/share above $67.50.