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The shares of Herbalife Ltd. (NYSE:HLF) are up 8.7% at $65.28, on reports of a significant stake by a famous hedge-fund manager. Earlier in the session, HLF tagged a new annual high of $66.26, sparking a flood of neutral-to-bullish betting in the options pits.
Around midday, the weight supplements concern has seen roughly 28,000 calls and 20,000 puts change hands, far surpassing its average intraday volume of around 11,000 calls and 5,900 puts.
On the call side, the stock's November 60 strike has seen nearly 2,000 contracts cross at a volume-weighted average price (VWAP) of $9.35 -- mostly on the ask side, suggesting they were bought. Plus, implied volatility is trending higher, hinting at new bullish positions.
By purchasing the calls to open, the buyers will begin to profit if HLF topples $69.35 (strike price plus VWAP) -- in territory not charted since May 2012 -- within the next couple of months. Risk is limited to the initial premium paid for the calls, should HLF breach $60 before November options expire.
Meanwhile, today's put sellers don't expect HLF to violate that round number -- not within the next couple of days, anyway. Specifically, the equity's weekly 8/2 60-strike put has seen 2,000 contracts trade on open interest of fewer than 1,800 contracts, pointing to new positions. Plus, implied volatility has skyrocketed 23.2 percentage points, hinting at fresh initiations. However, most of the out-of-the-money puts crossed on the bid side, suggesting they were sold.
By writing the puts to open, the sellers are betting on HLF to remain north of $60 through Friday's close, when the weekly options expire. In this best-case scenario, the puts will remain out of the money, and the sellers can pocket the entire premium received from the sale.
While demand for HLF options has gone down after earnings, the stock's short-term contracts aren't necessarily cheap. The equity's Schaeffer's Volatility Index (SVI) remains at 84% -- above 47% of all other readings of the past year.
From a sentiment perspective, Herbalife Ltd. (NYSE:HLF) option players were optimistic even before reports of a long stock position from George Soros. In fact, the security's Schaeffer's put/call open interest ratio (SOIR) sits at a 12-month low of 0.71, indicating that near-term option traders haven't been more call-heavy during the past year.