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SUPERVALU Inc. (SVU - 4.53 ) hasn't exactly been living up to its superlative moniker of late. Options traders are expecting the stock's underperformance to continue, at least through the fall, and are adjusting their bearish bets accordingly.
The parent of a number of grocery chains including Acme, Albertsons, Jewel-Osco, and Shop n Save, is currently trading in territory not seen since the first seasons of Dynasty -- that's the early 1980s, folks. The shares are down 44% in 2012 alone, have lagged the S&P 500 Index (SPX) by 27% in the last three months, and are starkly underperforming sector rivals Kroger (KR - 21.86)and Safeway (SWY - 18.81).
On Tuesday, SVU put volume was seven times greater than usual, as option traders moved July 4-strike long puts to a later series and a lower strike -- specifically, the October 3 strike. In other words, they opted to keep the bearish bets open for a longer time period and are predicting an even steeper slide in the shares.
Shortly after 2:00 p.m. Eastern, blocks of 10,000 contracts traded at both strikes. The July puts were evidently sold to close for 15 cents, and the October puts were bought to open for 20 cents, so the trader paid a total credit of 5 cents per roll. If SVU is trading below the $2.80 breakeven price when October options expire, profit is unlimited down to the zero spot. Losses, meanwhile, are limited only to the premium paid.
While SVU price action hasn't exactly been lighting the world on fire, these October-dated puts are fairly aggressive, calling for a drop of roughly 38% in the next four months or so (from its current price to the breakeven price for the put). The delta for the October 3 put sits at 15, reflecting a 15% chance the options will finish in the money (it also means the puts will gain 15 cents for every single-dollar decline in SVU's price).
Perhaps the SVU bear intends on perpetually rolling these long puts forward, collecting a little bit of profit each time. It's hard to argue with a long-put strategy as long as the stock is sitting at 30-year lows. Short sellers have understandably been out in force on this downtrending name; shorted shares currently represent 44% of Supervalu's float, and the short-interest ratio on SVU stands at 15.8 days to cover. As the equity continues to approach penny-stock status, however, this strategy may become less appealing from a risk/reward standpoint.