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Option Bears Hone In on Herbalife Ltd. (HLF)

Herbalife Ltd. skeptics are scooping up back-month put options

by 3/18/2014 2:19 PM
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Option Brief: Herbalife Ltd. (NYSE:HLF) is bucking the broad-market trend higher today, as traders continue to hit the bricks in the midst of a Federal Trade Commission investigation. So far, HLF has shed 0.6% to trade at $53.17 -- after touching a new year-to-date low of $52.35 earlier -- and options players are rolling the dice on more red ink for the beleaguered weight management concern.

In afternoon action, HLF has seen roughly 18,000 puts cross the tape -- a 40% mark-up to its average intraday put volume, and more than double the number of HLF calls exchanged. Most popular is the out-of-the-money April 47.50 put, which has seen close to 4,700 contracts change hands on open interest of just 408 contracts, pointing to an influx of fresh initiations. Plus, the majority of the puts traded on the ask side, suggesting they were bought.

By purchasing the puts to open, the buyers expect Herbalife Ltd. (NYSE:HLF) to breach $47.50 -- territory not charted since mid-July -- within the next four-plus weeks. Specifically, the volume-weighted average price (VWAP) of the puts is $2.52, meaning the buyers will reap a reward if HLF is sitting south of $44.98 (strike minus VWAP) at the close on Thursday, April 17, when the back-month options expire. Risk, on the other hand, is limited to the initial premium paid for the puts, should HLF remain atop the strike through expiration.


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