Get in the AutoZone (AZO)?

by Dan September 21, 2016 1:50 pm • Trade Ideas

AutoZone (AZO) reports fiscal Q4 results tomorrow before the open. The options market is implying about a 3.25% one day move which is essentially inline with its long term average.

AZO saw a 12% (or $100) decline from its July all time highs (now down about 9% with the stock’s bounce in the last week). The sell-off accelerated in August as expectations for a rate hike by the FOMC increased, and just before the Big 3 automakers were about to report August sales that were basically down 5%.  What strikes me as odd is that higher rates and slowing new car sales should be good for a parts re-seller like AZO as people will likely keep their existing cars longer if credit is tighter and new car sales stall.

Near term $720 is obvious support, with the February (52 week low) of $700-680 a sort of must hold level:

[caption id="attachment_66491" align="aligncenter" width="600"]AZO 1yr chart from Bloomberg AZO 1yr chart from Bloomberg[/caption]

Why a must hold? Well, the long term chart from the 2008 lows (resulting in nearly 800% gains) shows the uptrend, basically long term support down towards $660, some 10% lower.

I would also add one more risk to the company’s business model. All this chatter of late of Autonomous cars, fleets of them run by Uber or Lyft’s mega-computers will likely draw-down on car ownership in the years to come (this is many years out, obviously), while the proliferation of electric vehicles (which don’t have engines with many of the traditional parts in them) could be a major headwind  to AZO long term.  But again, those sorts of concerns are at least a few years away.

As for the here and now, total options open interest is at relative low, despite the stock’s recent volatility and $22 billion market cap, with 14,000 calls and 8,000 puts:

[caption id="attachment_66492" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

As the stock has declined of late, it’s been in a fairly orderly fashion. But nonetheless, short dated options prices have rocketed, with 30 day at the money implied volatility (blue below at 22.25%) jumping higher, while 30 day realized volatility (how much stock is moving – white below) is still just off of 52 week lows. That’s a fairly wide spread and shows demand for options into the uncertain event is well above what the stock is actually doing:

[caption id="attachment_66493" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

So what’s the trade? I don’t have one. I don’t have a directional bias, I took a look at the stock because I am interested in what they will have to say about car sales, the consumer etc. The other themes I brought up about Autonomous & electric cars is an interesting theme to keep an eye on when they started getting questions on them, but not likely soon.

Lastly, we always get questions about high priced stocks like this, basically is it even worth it trade options in, as most retail traders can only trade so few contracts.  The answer is simple, there is no reason the price of the stock, or the amount of the contracts should dissuade you from trading in something you have conviction in.  For instance, if you thought the stock’s sell off was unwarranted and the stock could move back towards the breakdown level at $800 on a beat and raise, then you could consider (vs stock at $748) the Oct 750 / 800 call spread (offered at about $16).  While that seems hefty, it is no different than paying $1.60 for 10 contracts of a 75 /80 call spread of a stock trading at $74.80 and defines risk versus what could be a large move in the underlying. The risk of course on that is that you get the direction wrong or the stock doesn’t move at all and you lose the premium paid. But it’s no different than if the stock was a much lower price if traded proportionally and accordingly.