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Herbalife Ltd. (HLF) Challenges Don't Deter Call Buyers

HLF remains a favorite among out-of-the-money call buyers

by 6/24/2013 10:48 AM
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The shares of Herbalife Ltd. (NYSE:HLF) are down 4.9% at $43.21, thanks to broad-market headwinds and reports the company is losing its top distributor. In fact, the nutritional supplements concern -- a point of contention for activist investors Bill Ackman and Carl Icahn -- has shed more than 7.4% so far this month, yet option traders continue to favor calls.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 1.67 indicates that option buyers have picked up more HLF calls than puts during the past two weeks. Even more telling, this ratio registers in the 67th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets of late.

Echoing that, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.96 stands just 15 percentage points from a 12-month nadir. In other words, near-term options traders are more call-heavy than usual right now.

In the July series of options -- which assumed front-month status over the weekend -- speculators have taken a shine to the July 50 and 52.50 strikes. These deep out-of-the-money strikes have seen around 1,800 and 1,700 calls added, respectively, during the past two weeks. Nevertheless, the deeper out-of-the-money July 60 strike remains home to peak call open interest, with more than 3,900 contracts in residence.

However, it's worth noting that short interest still accounts for nearly 37% of Herbalife Ltd's (NYSE:HLF) total available float, representing almost two weeks' worth of pent-up buying demand, at the stock's average pace of trading. Against this backdrop, it's possible that the growing affinity for out-of-the-money calls could be attributable to hedging activity among the shorts.


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