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Bearish Betting Heats Up on Herbalife Ltd. (HLF)

Herbalife Ltd. speculators are buying puts at a rapid-fire rate

by 4/16/2014 10:32 AM
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Herbalife Ltd. (NYSE:HLF) can't stay out of the news. Within a week, reports emerged of an FBI investigation into HLF's business practices, the firm was slapped with a class action lawsuit by shareholders calling it a pyramid scheme, and now sources say New York Attorney General Eric Schneiderman is probing the nutritional supplements supplier. Against this backdrop -- and ahead of Herbalife's turn in the earnings confessional later this month -- speculators are scooping up bearish bets at a near-annual-high clip.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day put/call volume ratio of 1.48. This ratio sits higher than 97% of all other readings from the past year, suggesting option buyers have picked up HLF puts over calls at a much faster-than-usual clip during the past two weeks.

As a result, HLF's Schaeffer's put/call open interest ratio (SOIR) rests at 1.56, indicating that puts outnumber calls among options expiring within three months. What's more, this ratio registers in the 85th percentile of its annual range, implying that short-term options players have rarely been more put-heavy during the past year.

In the soon-to-expire April series of options, speculators yesterday picked up HLF's April 52 put, which saw an overnight open interest increase of nearly 1,400 contracts -- the most of any strike. Considering four out of five of the front-month puts traded at the ask price, it's safe to assume a healthy portion were bought to open.

By buying the puts -- which expire at the end of the holiday-shortened week -- the traders expect HLF to retreat beneath $52 over the next couple of sessions. Risk, meanwhile, is limited to the initial premium paid for the puts, should the stock -- last seen 0.4% higher at $55.27 -- remain atop the strike.

Elsewhere, short interest rose 13.4% during the most recent reporting period, and now accounts for more than one-third of HLF's total available float. At the security's average daily trading volume, it would take more than seven sessions to repurchase all of these pessimistic positions.

On the charts, Herbalife Ltd. (NYSE:HLF) has surrendered more than 30% in 2014, pressured lower by its 10-week moving average. And if history is any indicator, it could get a bit rougher after the firm reports earnings on Monday, April 28. While the company has exceeded the Street's per-share profit predictions in each of the past eight quarters, HLF averages a one-week post-earnings loss of 4.1%.


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