Herbalife Stock Pullback Could Be a Buying Opportunity

Low volatility expectations are being priced into short-term HLF options

Aug 4, 2017 at 3:21 PM
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It's been a rough stretch for Herbalife Ltd. (NYSE:HLF). Since running into familiar resistance in the $74 neighborhood in mid-July -- a region that contained HLF stock's last three rally attempts -- the shares have shed nearly 11% to trade at $65.74.

Herbalife stock has most recently been impacted by a second-quarter revenue miss and concerns over the Federal Trade Commission's (FTC) requirement the company provide receipts showing 90% of its sales come from paying customers. Additionally, the Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) have asked for documents relating to Herbalife's anti-corruption compliance in China.

hlf stock daily chart august 4

Herbalife Trades Near Historically Bullish Trendline

This retreat brought HLF shares back to the $62.40-$62.60 neighborhood -- coinciding with their early May pre-bull gap levels and a 50% Fibonacci retracement of the stock's March-to-June surge -- where they squarely bounced. The security also came within one standard deviation of its 160-day moving average, which has been a bullish signal in the past.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, in the six other times this has occurred in the past three years, Herbalife stock has gone on to average a five-day gain of 3.5%, ending higher 83% of the time.  Going out one month, the equity has averaged a 3.2% return, and has been positive two-thirds of the time.

Traders Have Been Betting Against HLF Shares

There's plenty of skepticism levied toward HLF, too, even with the stock still up almost 37% year-to-date. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Herbalife's 10-day put/call volume ratio of 1.98 ranks in the 74th annual percentile, meaning puts have been bought to open over calls at a quicker-than-usual clip.

Plus, HLF's Schaeffer's put/call open interest ratio (SOIR) of 2.07 not only indicates put open interest more than doubles call open interest among options set to expire in three months or less, it ranks at the top of its annual range. In other words, short-term options traders have rarely been as put-heavy toward the stock as they are now. More broadly speaking, total put open interest on Herbalife rests in the 93rd annual percentile, with 219,278 contracts outstanding.

Short sellers have taken a sharp stance against the stock, too, with Bill Ackman among Herbalife's most vocal critics. Despite the fact short interest dropped 1.7% in the most recent reporting period, these bearish bets account for a whopping 46.5% of the stock's available float -- or 33 times the average daily pace of trading. Going forward, an unwinding of pessimism both in and out of the options arena could create tailwinds for Herbalife.

Herbalife Stock Options are Cheap

Two volatility indicators suggest it's a prime time to purchase premium on the stock's short-term options. While HLF's Schaeffer's Volatility Index (SVI) of 26% ranks lower than 93% of all comparable readings taken in the past year, it's 30-day at-the-money implied volatility of 25.4% ranks 1 percentage point from an annual low. In other words, low volatility expectations are currently priced into HLF's near-term options, a potential boon to premium buyers.

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