Supervalu Options (SVU): Unusual Trading Activity

| July 13, 2012 | 0 Comments

Options on retail grocer Supervalu (SVU) are experiencing unusual activity today.

Supervalu doesn’t normally trade many option contracts. With a stock price under $5 per share, it’s a name most option traders don’t pay a lot of attention to.

But that could be about to change… and not in a good way! 

You see, SVU is in trouble.

The company continues to lose disproportionate market share and underperform its peers.  And this, coupled with a very rocky stock market, isn’t giving traders a warm and fuzzy feeling.

To say option traders are getting spooked would be an understatement!

Supervalu’s down a whopping 43% this morning at $2.95.

And today’s large option trade in SVU reflects that in a big way.  Our tracking system picked up multiple traders coming in and purchasing 10,000 SVU July $3.00 put contracts at a price of $0.30 apiece.

The total cost of the trades was $300,000.

It’s a highly bearish trade to say the least. 

Don’t forget, this is a straight put position with unlimited upside potential.  As long as SVU continues falling in value, these traders stand to rake in a tidy profit.

And believe it or not, I think this trade has a good chance of success.  SVU may just be next in a long line of companies to file for bankruptcy.

As you may know, Supervalu operates in two segments… retail grocery stores and independent services.

The company’s grocery stores account for roughly 75% of sales and operating profits.  The primary store formats are conventional supermarkets operating under 12 different banner names as well as low-price, limited-assortment Save-A-Lot grocery stores.

Supervalu’s independent services division is responsible for the company’s remaining sales.  They provide distribution and related logistics support services to more than 2,500 independent grocery and other retail endpoints.

So why are option traders so negative on Supervalu all of a sudden?

Well, first off, SVU just announced earnings with a huge EPS and revenue miss.

One reason for this is the company’s high cost structure.  It’s preventing Supervalu from stopping the secular market share shift to non-traditional food retailers.

According to government data, traditional grocery store chains have seen their market share decline to 58%.  That’s a huge drop from 78% in 1983.

In addition, grocery distribution is a diminishing business.  The problem is the segment currently accounts for about 22% of Supervalu’s total sales and 25% of its EBITDA.

The ongoing decline doesn’t bode well for the company’s future growth.

What’s worse, the overall food market is estimated to decline 2%-4% annually in the foreseeable future.  It will be tough for SVU to make any sort of turnaround in a shrinking market.

Clearly, with all this negative information swirling around Supervalu, the idea of buying some puts here makes a lot of sense.

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Options Trading

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