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Option bears have been clobbering Herbalife Ltd. (NYSE:HLF), with speculators scooping up puts at a rapid-fire rate. During the course of Tuesday's session, the maker of nutritional products saw roughly 34,000 puts change hands -- more than four times the norm. More specifically, bears bought to open weekly 4/12 37-strike puts and April 33 puts, to gamble on more short-term downside for HLF. That skepticism has bled into today's session, with puts already flying off the shelves.
So far, HLF -- which is currently trading in the $36.87 region, down 0.2% -- has seen around 3,800 puts cross the tape, compared to its average intraday volume of fewer than 2,400 puts. Meanwhile, about 2,500 Herbalife calls have exchanged thus far.
Digging deeper, the bears seem to be scooping up the May 30 put, which has seen around 450 contracts traded at a volume-weighted average price (VWAP) of $1.20. Furthermore, implied volatility is trending higher, at last check, and most of the puts have crossed on the ask side, underscoring our suspicions of more bearish initiations.
By purchasing the puts to open, the buyers expect HLF to breach the $30 level within the next several weeks. In fact, the speculators will begin to profit if the shares fall south of $28.80 (strike price minus VWAP) -- which would mark a new year-to-date low -- by the close on Friday, May 17, when back-month options expire. Should the equity remain north of the strike, the most the buyers can lose is the initial premium paid for the puts.
However, the stock's Schaeffer's Volatility Scorecard (SVS) currently stands at a modest 35. This suggests that Herbalife Ltd.'s options are somewhat pricey at the moment, compared to the probability of an outsized move on the charts.
Speaking of the charts, HLF is down about 5% so far this week, thanks to drama on the corporate front -- not centered on Carl Icahn this time. On Tuesday, KPMG resigned as auditor of Herbalife Ltd., after one of its partners was fired for allegedly selling confidential information on HLF and Skechers USA Inc (NYSE:SKX). The FBI and SEC are reportedly investigating accusations of insider trading among some KPMG clients. What's more, DA Davidson downgraded HLF to "neutral" from "buy" and hacked its price target to $38 from $78, citing concerns about the firm's compliance with NYSE requirements. However, Herbalife said it doesn't expect to lose its listing on the exchange.