Earnings Explosion Rips Herbalife Ltd. (HLF) Shorts, Rewards Option Bulls

An earnings beat has sent Herbalife Ltd. (HLF) stock 24% higher

by Alex Eppstein

Published on Feb 26, 2016 at 10:45 AM
Updated on Jun 24, 2020 at 10:16 AM

Sorry, Bill Ackman, but Herbalife Ltd. (NYSE:HLF) is breaking out. Shares of the nutritional supplements marketer were last seen 23.8% higher at $56.64, following upbeat earnings. Also, the company said it's speaking with the Federal Trade Commission (FTC) to resolve an investigation into its business model.

While Ackman may not be too happy with HLF's earnings surge, plenty of option traders are. The stock's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 1.56, indicating long calls easily outstrip long puts. What's more, this ratio ranks in the high 96th percentile of its annual range.

Echoing this is HLF's Schaeffer's put/call open interest ratio (SOIR) of 0.48. This SOIR indicates call open interest more than double put open interest among options expiring in the next three months. And because the reading rests south of 98% of comparable ratios from the past year, we can infer that short-term speculators are more call-skewed than usual.

Of course, these call traders are not necessarily bullish on the stock. In fact, some calls may have been purchased by short sellers seeking an upside hedge, considering 35.5% of HLF's float is sold short. At the stock's average trading volume, it would take about 13 sessions to cover these bets. Obviously, given HLF's blast-off today, shorts had better hope they were hedged.

Looking more closely at the charts, the stock is now approaching an area of resistance near $60. From August through December, HLF made multiple attempts to decisively hurdle the strike, but was ultimately rejected. It could be tough sledding this time around, too, with peak call open interest of nearly 19,000 contracts residing at the March 60 strike.

Of course, the result of the aforementioned FTC probe could go a long way in determining where Herbalife Ltd. (NYSE:HLF) goes next. But as the company explained in a statement, a resolution is unclear and could include "a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action."

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