Is the End Near for Sears? Implied Volatility Elevated as Bankruptcy Concerns Mount


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It has been a rough 2016 for Sears Holding ($SHLD).  In fact, it has been a dramatic fall from grace over the past 18 months for owner of the Sears and Kmart brands, bringing the iconic retailer - a company that helped create mass retail culture more than 100 years ago - to the brink of bankruptcy.

This leaves the company poised at a decision point.  Some analysts are predicting a potential bankruptcy filing, possibly in the near term.  Or the company could leverage its not-insubstantial remaining assets in an attempt to extract whatever value is left.  Or, as the company has been saying, it could finally be ready for a turnaround, however unlikely this may seem to Wall Street experts.

Whatever happens, expectations in the options market for volatility in the stock remain high.  The expectation seems to be that either shares of SHLD are poised for a rebound, or they are ready for a further slide into oblivion.

Sears closed 2015 at $20.56.  It is currently trading at $8.26.  This followed a similarly tough run last year.  The stock was trading around $43 in May of 2015, after optimism about a turnaround helped push shares higher during the early months of the year.  But the stock sold off in early June after the release of its quarterly report and has continued to decline since.

The stock performance isn't a surprise, given the company's underlying fundamentals.  Sears Holdings has posted 20 straight quarters of red ink.  That's right: five full years without a profitable quarter.  

Earlier this month, the company issued its latest quarterly report.  This included a net loss of $748 million (reduced to $333 million when certain items were removed).  This compared to a loss of $454 million last year, or $305 million on an adjusted basis. 

Revenues dropped more than 12% in the third quarter to reach a level just above $5 billion.  The company attributed part of the decline to a lower number of stores in operation compared to 2015.  However, same-store sales also suffered a notable decline, falling 7.4% from the previous year.

This week, Motley Fool issued a lengthy report about the company, calling it a "zombie retailer" and pointing out that both Fitch and Moody's are predicting the company will eventually go out of business.  The report also noted that retailers that go bankrupt have a tendency to file in January, when they still have the cash from holiday sales in their bank accounts.

There are other options for the company, though.  The Sears and Kmart brands still have some name recognition with shoppers.  Meanwhile, the company has a large real estate portfolio that it could liquidate.  The company also owns a number of product brands, like Craftsman and Kenmore.

For its part, the company claims that it is still committed to a turnaround.  In its last earnings report, CEO Eddie Lampert said "We remain fully committed to restoring profitability."  He also laid out a plan of further shrinking the company as a path to profitability, cutting unprofitable stores and reducing space in stores where they continue to operate.

In the option market, implied volatility remains elevated for SHLD, though off a 2016 peak reached just before its most recent earnings report.  Currently, IV is sitting at 102.9, well above its 2016 average.  It reached 127.9 on December 6, just ahead of the release of the company's quarterly report.

The ATM Straddle premium for the December 30 expiration is $0.53, or 6.5%.  For January 6, it sits at $1.01, or 12.2%.  Looking further out, the ATM Straddle premium for the January 2018 expiration, which has a high level of open interest, now sits at $6.17, or 74.7%.