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Nutritional supplements concern Herbalife Ltd. (NYSE:HLF) will step into the earnings confessional tonight, just a session after its annual shareholder meeting. Despite the stock's year-over-year deficit of roughly 45%, options traders have purchased HLF calls over puts at a faster-than-usual clip in recent months.
On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security sports a 50-day call/put volume ratio of 1.88, indicating that traders have bought to open almost two HLF calls for every put during the past 10 weeks. What's more, this ratio registers in the 72nd percentile of its annual range, pointing to a healthier-than-usual appetite for long calls of late.
In the front-month series of options, the May 50 strike is home to peak call open interest, with more than 10,000 contracts in residence. These calls are deep out of the money, with HLF currently lingering near $38.65. Meanwhile, the out-of-the-money May 42.50 call is home to nearly 9,400 contracts outstanding.
Against this backdrop, it's worth noting that short interest accounts for a whopping 43% of Herbalife Ltd.'s total available float. In fact, it would take about two weeks to buy back all of these bearish bets, at the stock's average pace of trading. As such, it's possible that the shorts purchased the aforementioned out-of-the-money calls to hedge their pessimistic positions. By doing so, they lock in an acceptable price at which to repurchase their shorted HLF shares, should the stock skyrocket in the near term. (On the flip side, a recent spike in deep out-of-the-money put buying may have been attributable to nervous HLF shareholders.)
Speaking of Herbalife Ltd. (NYSE:HLF) shareholders, the group on Friday elected the two nominees of Carl Icahn -- just one of several activist investors tied up in the firm -- to the board of directors. In addition, the company said it's still in the process of finding a new auditor to replace KPMG, which hit the bricks amid an insider trading controversy. Ahead of tonight's earnings report, Wall Street is expecting a per-share profit of $1.07 for Herbalife, which has exceeded bottom-line estimates in each of the past four quarters.
On the charts, HLF has surrendered 47.5% since touching an all-time peak of $73 almost a year ago, ushered lower beneath its 20-week and 32-week moving averages.