Herbalife Ltd. (HLF) Bulls Place Pricey Pre-Earnings Bets

Herbalife Ltd. (HLF) is slated to report earnings after Thursday's close

Feb 23, 2015 at 2:52 PM
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Herbalife Ltd. (NYSE:HLF) is slated to take its turn in the earnings confessional after Thursday's close, and ahead of the event, options traders have been piling up on long calls. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.00 ranks in the 75th annual percentile. In other words, calls have been bought to open over puts at a faster-than-usual clip in recent weeks.

It's a similar set-up in today's trading, with calls crossing the tape at slightly accelerated clip. One of HLF's most active options is the weekly 2/27 39-strike call, where it appears buy-to-open activity is occurring. By initiating these long calls, speculators expect HLF to be sitting north of $39 at week's end, when the weekly series expires.

However, there could be an ulterior motive to this recent rash of call buying. More than two-fifths of the stock's float is sold short, meaning shorts could be using long calls to guard against any post-earnings upside. Regardless, short-term traders are willing to pay up for their pre-earnings bets on HLF, as evidenced by the equity's Schaeffer's Volatility Index (SVI) of 95%, which ranks higher than 70% of similar readings taken in the past year.

Historically speaking, HLF has performed poorly in the wake of reporting earnings. Over the past eight quarters, specifically, the stock has averaged a single-session post-earnings loss of 4.9%. This time around, the options market is expecting a move of roughly 12.4%, and considering the weekly 2/27 34.50-strike put is pricing in higher implied volatility than the call (162.2% vs. 149.4%), it appears the action is expected to resolve to the downside. At last check, Herbalife Ltd. (NYSE:HLF) was off 3.1% to trade at $34.32.


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