Wednesday, April 13, 2011

Big Lots (BIG) - Big Vol and Big News Coming in BIG

BIG is trading $42.86, down 0.9% with IV30™ down 1.6%. The LIVEVOL® Pro Summary is below.


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Big Lots, Inc. through its wholly owned subsidiaries is a closeout retailer. The Company’s merchandising categories include Consumables, Home, Furniture, Hardlines, Seasonal, and Other.

The news here is the vol -- and specifically, the vol reflected by the potential bid for a takeover. Here's a news snippet from Financial Times (
Several private equity firms are receiving management presentations from Big Lots (NYSE:BIG), two sources familiar with the process told dealReporter.

Some of the financial sponsors have formed consortiums to bid on the Columbus, Ohio-based closeout retailer. TPG and Bain Capital have formed one group, while Leonard Green & Partners and CVC Capital Partners have joined forces for another, these sources said. Thomas H. Lee Partners, meanwhile, may be working on it own, said the first source.

The next round of bids is expected around 20 April, although the date is not set in stone and could change depending on the progress of ongoing due diligence by potential suitors, the sources said.

Goldman Sachs, the financial advisor to Big Lots, is running “a robust sale process,” a third source said. However, bidders are intent on taking their time with due diligence, this source added.
Source:Leonard Green and CVC join Big Lots auction process By Bhavna Kaul, Yana Morris and Soma Biswas

Ah ha...

It's interesting to note that BIG likely has earnings after the May options cycle, but the vol in July (third month) is still substantially depressed to May b/c of the takeover news. I've inlcluded the Skew Tab below.

The shape of the skew is normal -- which in this case is a bit odd, or at least noteworthy. The option market does not reflect equal risk to the upside as the downside. That may be in part due to the stock price pop that occurred on first news of BIG going up for sale.

The Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I've highlighted two things:
1. The stock pop on the first news of BIG going for sale.
2. The notably elevated IV30™ relative to HV20 and HV180.

Finally, let's turn to the Options Tab.

Without delving too deep, we can see the ATM May straddle (42.5 strike) is worth about $4.55, or 10.7% of the stock price.

Possible Trades to Analyze
With the skew showing little shape changes and the uncertainty as high as it is, I actually don't see any compelling trades to analyze right now. I'd rather watch this thing play out and possibly find some skew trades as the story progresses. This is definitely one for the watchlist.

This is trade analysis, not a recommendation.

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