Why Herbalife Ltd. (HLF) Call Buyers May Be Rattled

Herbalife Ltd. (HLF) is moving on reports of a federal probe

Apr 6, 2015 at 11:56 AM
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Herbalife Ltd. (NYSE:HLF) has been on a technical tear of late, but is on shaky ground today after reports surfaced that federal law enforcement agencies have spoken with several of the company's top members. This is potentially bad news for call buyers -- of which there have been plenty in recent weeks.

During the last 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), HLF has racked up a call/put volume ratio of 1.25. Not only does this indicate long calls have outpaced puts, but the metric also outranks 84% of comparable ratios from the last 12 months. In other words, traders have bought to open the equity's calls over puts at a faster-than-usual rate recently.

Echoing this, HLF's Schaeffer's put/call open interest ratio (SOIR) is 1.03. Significantly, this SOIR is lower than 89% of similar readings from the previous year, hinting at a stronger-than-usual bias for short-term calls over puts.

Of course, it's worth noting that roughly two-fifths of HLF's float is sold short. At the stock's average daily trading levels, it would take over two weeks to buy back these positions. Therefore, it's possible some of the recent call buying -- particularly at out-of-the-money strikes -- was at the hands of short sellers seeking an upside hedge.

As alluded to, Herbalife Ltd. (NYSE:HLF) has turned in a strong technical performance lately. Shares of the nutritional supplement marketer have outperformed the broader S&P 500 Index (SPX) by 31.5 percentage points over the last month. The equity was down nearly 4.5% at its low today, but was last seen just below breakeven at $42.90.

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