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September 23, 2013  Mon 11:44 AM CT

KMX: SEE CHART GET CHAIN FIND STRATEGIES
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.

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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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