Calls Run Hot as Herbalife Ltd. (HLF) Catches Fire

Herbalife Ltd. (HLF) has soared 14% week-to-date

by Digital Content Group

Published on Mar 20, 2015 at 2:29 PM
Updated on Aug 5, 2020 at 9:47 AM

Herbalife Ltd. (NYSE:HLF) has jumped 8% today to trade at $40.97, after a California judge dismissed a lawsuit by shareholders claiming the company's business practices constitute a pyramid scheme. This represents the second legal win for the firm this week -- though Bill Ackman's Pershing Square Capital quickly issued a statement saying today's dismissal does not "exonerate or bless Herbalife's business practices." Meanwhile, in options land, traders are exchanging calls at triple the typical intraday rate.

Most popular is HLF's April 60 call, which Trade-Alert suggests is seeing buy-to-open activity. In other words, speculators expect the shares to rally north of $60 -- a more than 46% premium to current trading levels -- by the close on Friday, April 17, when the options expire. At the same time, with 40% of the security's float sold short, it's possible short sellers are purchasing out-of-the-money calls to hedge against additional upside. Meanwhile, eleventh-hour bulls are buying to open the in-the-money March 40 call, anticipating the stock will extend its lead north of $40 through tonight's closing bell.

Today's appetite for long calls over puts reflects a longer-standing trend in HLF's options pits. During the last two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security has racked up a call/put volume ratio of 1.41 -- higher than all but 9% of readings from the past year.

Echoing this call-bias is HLF's Schaeffer's put/call open interest ratio (SOIR) of 1.16, which ranks in the 15th annual percentile. In other words, short-term traders have rarely preferred calls over puts by a wider margin, looking at the past 12 months of data.

This is understandable, considering the type of year Herbalife Ltd. (NYSE:HLF) is having. The stock is up roughly 9% in 2015, and has outperformed the broader S&P 500 Index (SPX) by 20 percentage points over the last two months. Even more impressive, the shares are on pace to close on a weekly gain of almost 14%.


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