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Option Brief: Herbalife Ltd. (NYSE:HLF) came under fire late last week, as a coalition of minorities requested a probe into the nutritional products company and its allegedly questionable business practices. Meanwhile, in Friday's options pits, traders targeted HLF puts over calls by close to a 2-to-1 margin, or 21,000 contracts to 11,000. By far the most active strike was the November 42 put, where north of 9,000 contracts changed hands.
Volume at that strike surged on an 8,136-lot that crossed near the ask price, at $0.50 per contract, suggesting the puts were purchased. Open interest gained more than 8,800 contracts over the weekend, as well, conveying buy-to-open activity. Therefore, in order for the aforementioned trader to profit, he needs HLF shares to plummet south of $41.50 (strike price less premium paid), by front-month options expiration -- that's more than a 35% drop from the stock's current post at $64.47 in roughly four weeks.
As such, delta on the put currently hovers at 0.047, or 4.7%, meaning there's less than a 1-in-20 chance the option will move into the money by the closing bell on Nov. 15. If Herbalife remains north of the strike price throughout its lifetime, Friday's big put buyer stands to lose 100% of the premium he paid at initiation -- which appears to be inflated, relatively speaking. Implied volatility at the strike was 110.3% at last check, compared to a one-month historical (realized) volatility of 44.5%.
One week from today, HLF will report third-quarter earnings, after the market closes. Despite beating analysts' earnings-per-share estimates during each of the past eight quarters, the stock has averaged a 2% and 2.7% loss in the respective day and week afterward. This, of course, may be one motivation behind the put buyer's actions.
At the same time, however, Herbalife Ltd. (NYSE:HLF) has nearly doubled in value in 2013, and continues to display technical tenacity on a relative-strength basis. In particular, during the past 60 sessions, the shares have outperformed the broader S&P 500 Index (SPX) by over 8 percentage points. Given this impressive long-term price movement, as well as potential concerns arising from HLF's recent negative press and upcoming earnings, it's possible the puts are protective (rather than speculative) in nature.
For recent commentary, charts, and sentiment indicators on Herbalife Ltd. (NYSE:HLF), visit our HLF quote page.