Schaeffer's Trading Floor Blog

The Great Herbalife (HLF) Debate, Continued

Tuesday's HLF rally was more notable than most of what we've seen this earnings season

by 7/25/2014 7:41 AM
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Perhaps in searching for big earnings reactions in high-profile names, I looked under the wrong rock. The biggest high-profile mover on expected news this week didn't even report numbers. Actually, the company didn't even report news. I'm referring, of course, to Herbalife Ltd. (NYSE:HLF).

They sell nutritional supplements. Or something like that. I'm not sure anyone follows the actual company anymore. It's become more just the venue for the Carl Icahn-Bill Ackman Battle Royale that allows everyone to pick and bet on a side.

This week was Ackman's turn to make news. He was all set to reveal his smoking gun about HLF's pyramid scheme. Except it went about as well as Geraldo opening up Al Capone's secret vault on live TV.

Here's a look at the stock over the last two weeks. It lifted 25% on Tuesday, way beyond any sort of options bid-up.

Herbalife Ltd. (HLF) Daily Chart Since Early July 2014

Actually, as you can see on the lower lines of the graph, there wasn't all that much options bid-up. HLF has averaged about a high 50s implied volatility in 2014. It traded a bit under that over the last few months, then ticked up modestly in July, but really just back to long-term averages.

And then on Monday, the stock dipped 10% and volatility started to perk up. Hindsight tells us if you went long HLF gamma last Friday, you made a mint. Should we have seen it coming?

Well, that's really hard to say. I'm sure everyone thought Ackman had more "evidence" supporting his case. No one forced him to make a high-profile presentation, so logic says why do it without major goods.

An objective observer a week ago saw a stock that hadn't moved all that much since February. Ten-day realized volatility in HLF had hovered in the 20s and below since April. So options volatility in the 40s and 50s represented a bit of a premium already. The lift into expected news seemed priced about right.

Small biotech probably offers us the best parallel to the options action here. Think of a one-product stock awaiting FDA approval on something. The stock itself may not move much into the announcement, but the options will price in a future gap somewhere. HLF just got de facto "approved."

What about now? Well, the "news" is out. I ignore this story at times when financial TV isn't going 24/7 Herbalife, so I can't tell you when the next presentation may arise. Earnings are due next week, but I'm not sure that's going to mean much to all the hot money in here. It's more about whether you believe the numbers are real or not. So my guess is, now's not the time to pay up for anything.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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