Supervalu Vol Explodes, Odds Of Bankruptcy Gleaned From Options Market
Ophir Gottlieb | Jul 13, 2012 10:30AM ET
Supervalue Inc. (SVU) is a United States grocery channel. It operates in two segments: Retail food and Independent business. The Company leverages its distribution operations by providing wholesale distribution and logistics and service solutions to its independent retail customers through its Independent business segment.
This is a vol and stock note in a company that has just hit 30 year lows (at least) and is at at least a 2-year high in implied vol after reporting earnings AMC yesterday. When something like this happens, we can actually back out the odds of bankruptcy with some simple math from the option markets. But, that probability is oddly low... for now. Let's start with the news, then look to the analysis.
Supermarket chain Supervalu (SVU) posted miserable first quarter results late on Wednesday and announced it will suspend its dividend. Shares fell 37% in pre-market trading. -- Source: Barron's via Yahoo! Finance; Futures Keep Slumping; Supervalu, Merck, Chevron in Focus, written by Avi Salzman.
And...
Supervalu Inc. one of the nation's largest grocers, said Wednesday it is considering selling all or part of the company.
As the Minneapolis / St. Paul Business Journal reports, Supervalu (NYSE: SVU) said in a news release that it has hired Goldman Sachs and Greenhill & Co. to help it "review strategic alternatives to create value for the company's shareholders." -- Source: The Business Portland Journal via Yahoo! Finance' Supervalu, owner of Albertsons, shops itself around .
Let's turn to some Charts to assess the real damage. We can start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
It's pretty simple, really. On the stock side, we can see the collapse today. A more holistic view demonstrates the stock decline from ~$7.50 just six months ago. But, it's actually much worse. I've included the Yahoo! Finance "Max" chart for SVU, below.
We can see the current stock price is lower than any back through 1985. I've read on Twitter that the price is actually a low since at least 1980, or 32 years.
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On the vol side, we can see the spike today is well into a six month high, but that too is too limited a view. I've included the 2-year vol chart (IV30™ only), below.
We can see the current level is well above any vol level over the last two years, and I suspect of all-time.
Let's turn to the Skew Tab for the month-to-month and line-by-line vols.
We can see a monotonic increase in vol from the back to the front. I do note the skew shape in Aug and Oct does show the OTM calls at higher vol than the ATM vol, which is not really "normal" skew. The Options Market does reflect some upside risk (potential),perhaps due to the news that SVU is looking to be bought.
Finally, let's turn to the Options Tab, for completeness.
We can see the monthly vols are priced to 131.08%, 124.16% and 91.39%, respectively for Jul, Aug and Oct. I do note a crucial point here -- the Jul and Aug "bankruptcy" puts are no bid. In English, the lowest strike puts are no bid which in a very back of the envelope way reflects the lack of risk of a bankruptcy through Aug. Although the Oct 1 puts are bid, the Jan'13 puts aren't, so that's sort of an anomaly, and in fact as I'm writing this, that bid has disappeared.
Normally we would calculate the risk of bankruptcy by using the lowest strike and take the mid-market value to compute a probability of bankruptcy like this:
Probability of Bankruptcy = (Put Value)/Strike
So for example, if the Oct 1 puts were $0.05 x $0.10 and we gave that a fair value of $0.075, the probability of bankruptcy by Oct expiry as reflected by the options market would be 7.5%. I re-iterate that this is not the case here. While the news is devastating to stock holders (and stakeholders of all sorts), as of yet, the option market does not reflect a tangible probability of bankruptcy... For now.
Disclosure: This is trade analysis, not a recommendation.
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