Herbalife Ltd. (HLF) Bullish Betting Hits Fever Pitch

Or are Herbalife Ltd. (HLF) shorts picking up hedges?

Feb 11, 2015 at 1:08 PM

Herbalife Ltd. (NYSE:HLF) is up 3.2% at $35.23, and option traders are betting on even more gains in the near term. HLF calls are trading at almost twice the typical intraday clip, echoing the growing trend seen on the major exchanges in the past two weeks.

Digging deeper, buy-to-open activity has been detected at the February 41.50 call and the weekly 2/27 40-strike call. Buyers of the front-month calls are betting on HLF to topple $41.50 -- territory yet to be charted in 2015 -- by the close on Friday, Feb. 20, when the options expire. The weekly calls will move into the money if HLF climbs atop $40 by the close on Friday, Feb. 27.

However, the $40 level has capped HLF's rally attempts over the past couple of months, and is home to the stock's descending 20-week moving average. This trendline hasn't been toppled on a weekly closing basis since early August. On a shorter-term basis, HLF has added more than 15% in February, and has advanced 27.6% since touching a two-year low of $27.60 on Jan. 7.

Weekly Chart of HLF since September 2013 with 20-Week Moving Average

As alluded to earlier, today's appetite for calls is more of the same for HLF. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio sits at an annual high of 2.82. In other words, option buyers have scooped up calls over puts at a much faster-than-usual rate recently.

It's worth noting, though, that short interest accounts for almost 42% of HLF's total available float. Against this backdrop, it's possible that some of the call buying -- especially at out-of-the-money strikes -- could be attributable to shorts looking to hedge against a rally.

Off the charts, Herbalife Ltd. (NYSE:HLF) has been a very public target of activist investor Bill Ackman. Meanwhile, the New York Post today reported that Federal Trade Commission (FTC) Chairwoman Edith Ramirez will share a stage with an HLF exec at an American Bar Association conference tomorrow, despite the FTC's ongoing probe.

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