Legal Win Has Herbalife Ltd. (HLF) Shorts on the Hot Seat

Today's legal news is good for Herbalife Ltd. (HLF), but bad for short sellers like Bill Ackman

Jul 29, 2015 at 1:57 PM
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More bad news for Bill Ackman and his huge short position on nutritional supplements marketer Herbalife Ltd. (NYSE:HLF) -- the shares show no signs of slowing down. Today, in fact, the stock has popped 3.7% at $52.46, after a U.S. federal judge dismissed a lawsuit accusing the company of misleading investors.

Options traders, on the other hand, are welcoming HLF's advance. During the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a call/put volume ratio of 1.80 -- with long calls nearly doubling puts. Also, this ratio ranks in the bullish 95th percentile of its annual range.

Of course, it's possible some of these speculators scooped up calls -- especially at out-of-the-money strikes -- to protect their short stock positions against a major upside move. After all, a lofty 28.2% of HLF's float is sold short, representing more than three weeks' worth of trading activity, at typical volumes.

Uncovered shorts, meanwhile, are likely reeling given the equity's technical tenacity. Year-to-date, HLF has soared more than 39%, and additional gains may be in store, with the company scheduled to report earnings after the close next Wednesday, Aug. 5.

Specifically, in the session following Herbalife Ltd.'s (NYSE:HLF) early May results, the stock exploded 16.5% higher. Moves of this magnitude are not usual -- over the past eight quarters, the shares have averaged an 8.6% swing in either direction, in the day subsequent to earnings. This time around, the options market is pricing in a 14% post-earnings move, based on near-term at-the-money straddle data.

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