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Herbalife Ltd. dropped on Friday, but is pointed higher this morning
Herbalife Ltd. (NYSE:HLF) is up 1.3% out of the gate -- thanks to a "buy" initiation and a whopping $110 price target at Pivotal Research -- but it was a different story on Friday, when the shares dropped 3.1% to close at $45.43. Not surprisingly, options activity tilted in a bearish direction, with puts trading at a 60% mark-up to the expected intraday rate. While short-term strikes were in demand -- per the stock's 30-day at-the-money implied volatility, which hit an annual high on Friday and ended 5.5% higher at 108.4% -- the most active strike was of the longer-term variety.
Diving right in, the January 2015 35-strike put was HLF's most popular option on Friday, with roughly 5,200 contracts on the tape. Almost all of them crossed at the ask price, and open interest added 4,710 positions over the weekend, collectively suggesting the purchase of fresh bearish bets. This theory is corroborated by data from the International Securities Exchange (ISE) and Trade-Alert.
By buying the puts to open, Friday's speculators expect shares of Herbalife Ltd. (NYSE:HLF) to drop below $35 by January 2015 options expiration. Looking back, however, the stock hasn't breached this level since April 2013. As such, delta on the put is a mere 0.23, suggesting a less than 1-in-4 chance the option will be in the money at expiration.