Pre-Earnings Options Traders Hone In On Herbalife Calls

Herbalife Ltd. (HLF) call options have been bought to open at an accelerated rate, possibly by short sellers

Feb 22, 2017 at 11:38 AM
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Herbalife Ltd. (NYSE:HLF) will report earnings tomorrow night, and ahead of the quarterly event, the stock is approaching some interesting levels. As the chart below shows, the shares have been trekking higher since bottoming in late 2016, but appear to have stalled at the 61.8% Fibonacci retracement of last year's highs and lows. This has resulted in a 14-day Relative Strength Index (RSI) reading over 75 for HLF -- in solidly overbought territory, suggesting a breather could be in the cards.

herbalife stock chart fibonacci retracement levels

It will be interesting to see whether Herbalife earnings can fuel the stock further. This wasn't the case last time around -- as the shares slid 6.2% in the session subsequent to the early November report. Prior to that, however, HLF managed post-earnings gains following three consecutive turns in the confessional. On a related note, if past is precedent, the stock could move around 11% on Friday, in either direction.

It seems options traders expect HLF to resolve to the upside after tomorrow night's earnings report. While slightly put-skewed on an absolute basis, the stock's 10-day call/put volume ratio of 0.94 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in the high 69th percentile of its annual range. In other words, call buying has actually picked up lately, on a relative basis.

The focus on calls is more clear within the March series, especially among near-the-money strikes. Specifically, HLF sports a front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.43, with calls more than doubling puts.

Options traders targeting calls, however, aren't necessarily bulls. With over 38% of the stock's float sold short, it's likely some calls have been purchased by short sellers trying to hedge against extended gains in HLF. At the shares' average trading pace, it would take over three weeks to cover all the short positions -- meaning that, without protective calls, these bears would be exposed to potentially heavy losses on a positive earnings surprise.

Short sellers could already be underwater, given Herbalife Ltd.'s (NYSE:HLF) recent burst higher. Year-to-date, the shares have gained a brow-raising 27% at $61.25. Not to mention, HLF stock has outperformed the broader S&P 500 Index (SPX) by more than 19 percentage points in the past 40 sessions.

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