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Herbalife Ltd. (HLF) Traders Bet On a Short-Term Rally

Short-term call buyers are gambling on Herbalife Ltd.

by 3/27/2014 2:21 PM
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Option Brief: Herbalife Ltd. (NYSE:HLF) call volume is at a 62% mark-up to its intraday average, and is outpacing put volume by a roughly 3-to-1 margin. Attracting the most attention is the nutritional supplement supplier's weekly 4/11 60-strike call, where 1,135 contracts are on the tape.

Two-thirds of the volume at this strike have crossed at the ask price, suggesting the contracts were purchased. What's more, implied volatility is 4.8 percentage points higher, and volume outstrips open interest, indicating freshly initiated bullish bets on HLF.

By purchasing the calls to open, the traders anticipate Herbalife -- which has gained 2.4% to $54.70 this afternoon -- will rally past $60 by the close on Friday, April 11, when the weekly options expire. However, it's worth noting that 29.7% of the stock's float is sold short, so a portion of today's long calls may be the work of short sellers hedging against a continued rise by the shares.

No matter what happens, the most the buyers have on the line is the initial premium paid, which they'll forfeit if HLF is trading at or below $60 when the options expire. From a volatility perspective, this looks to be a fairly modest sum, given the equity's Schaeffer's Volatility Index (SVI) of 51%, which sits in the bottom one-fifth of all comparable readings from the past year.

On the charts, Herbalife Ltd. (NYSE:HLF) has struggled in 2014, hurt recently by the Federal Trade Commission's decision to probe the business' marketing practices -- something activist investor Bill Ackman has been demanding for years. In response, HLF earlier this week launched a website designed to defend its business model.


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