Premium Earnings 4-6-16: Conagra Foods and Carmax

• Posted by Greg Harmon
• on April 6th, 2016

{+++}Two names today that report before the open tomorrow, Conagra Foods, $CAG, and CarMax, $KMX.

Conagra Foods, $CAG

Conagra Foods, $CAG, gapped higher in June 2015 and has been in a channel between 39 and 45.50 ever since. The price action carved out a saucer and is now at the top again into earnings. The RSI that is in the bullish zone, and the MACD is rising. There is support lower at 44 and 42.75 followed by 41.50 and 41.25 before 40 and 39. There is resistance at 45.50 and then free air above. The reaction to the last 6 earnings reports has been a move of about 2.05% on average or $0.95 making for an expected range of 44.25 to 46.25. The at-the money April Straddles suggest a larger $2.30 move by Expiry with Implied Volatility at 41% above the May at 28%. Short interest is low at 1.5%. Open interest is focused at 44 and 45 on the Call side but smaller than the Open Interest at 43 on the Put side.

Trade Idea 1: Buy the April 45/44-43 1×2 Put Spread for free.

Trade Idea 2: Buy the April 45/43/41 Put Butterfly for $0.60.

Trade Idea 3: Buy the April/May 46 Call Calendar (65 cents) and sell the April 43 Put for 20 cents.

Trade Idea 4: Sell the April 43/46 Strangle for a $1.20 credit.

#1 and #2 give the downside with #1 using leverage. #3 looks for the upside longer term with leverage. #4 is profitable on a close from 41.80 to 47.20 at Expiry. I prefer #3 or #4.

CarMax, $KMX

CarMax, $KMX, made a bottom in early February after falling almost 45% from its high a year ago. The bounce and then minor pullback has created a bullish Cup and Handle formation that gives a target of 64.75 to the upside. At prior resistance in to earnings, it is also just below a 38.25 retracement of the down leg. The RSI turning back up in the bullish zone, while the MACD crosses up and is rising, both supporting a move higher. There is support lower at 51.30 and 50.25 followed by 48 and 44.25. There is resistance above at 53.25 and 55 followed by 56 and 57 before 59.70 and 62. The reaction to the last 6 earnings reports has been a move of about 7.48% on average or $4.00 making for an expected range of 49 to 57.25. The at-the money April Straddles suggest a larger $5.00 move by Expiry with Implied Volatility at 70% above the May at 40%. Short interest is high at 16.0%. Open interest is very big on the Put side at 45 and 50 but also large at 52.5, 47.5 and 37.5. On the Call side it is spread from 47.5 to 60 and much smaller.

Trade Idea 1: Buy the April 52.5/50 1×2 Put Spread for a 20 cent credit.

Trade Idea 2: Buy the April 52.5/55 Call Spread ($1.45) and sell the April 50 Put for 25 cents.

Trade Idea 3: Sell the April 45/60 Strangle for a $0.60 credit.

#1 gives the downside with leverage and a possible entry at 47.50. #2 offers a potential entry at 50 and the upside. #3 is profitable on a close from 44.40 to 60.60 at Expiry. I prefer #1 or #2.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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