Wednesday, August 27, 2014

* Herbalife (HLF) - How a Tweet Rocked the Market and May be Nuts.. But the Stock Chart May be Even Crazier.

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HLF is trading $51.05, up 3.2% with IV30™ ripping up 21.5%. The Symbol Summary is included below.

Provided by Livevol

Nobody understands HLF, yet many people claim, with conviction nearly unheard of in finance, to know everything.  The stock chart will shock you... like jaw drop shocking.  The risk levels may too.

Just to be clear, the 'news' that has pushed the implied volatility up in HLF up 22% and the stock up 3.2% is this tweet from Carl Icahn:

The tweet was in response to Rich Handler's "ice bucket challenge" to Icahn after dumping himself into... well... an ice bucket... And why the market has digested it as HLF news, I dunno.  I suppose the firm is certainly on his radar so risk should rise... right?

The two-year stock chart is included below.

Provided by Charles Schwab optionsXpress

As we can see the stock moves in a wild swings.  Crazy gaps down, crazy recoveries, mostly driven by outside forces (aka billionaires with bullhorns ) and once in a while by earnings events.

But here's the jaw dropped... ready?...

Is this two-yer period, from endpoint-to-endpoint, HLF has moved $0.90.  Yep. Ninety cents... as in, less than a $1.

Now, here's your turn for an opinion, is the stock "low risk" b/c endpoint-to-endpoint it hasn't at all, or is it a risky stock b/c of all those arrows in that stock chart?

Your answer will either put you at direct odds with the option market, or in complete agreement... let me show you why.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. We can see that the current level of risk (where the red curve is now) is pretty low for HLF.  As of yesterday, the IV30 was in the 15th percentile on an annual basis, which is quite low.  Even with the pop today in the vol, the IV30 is in the 30th percentile, which is still 'pretty low.'

So... is the option market right?  is the risk in HLF for the next 30 calendar days low, or has it lost its mind given that the risk has moved up 21% on a pretty benign tweet from Carl Icahn?

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$46, $56] by the end of trading on Sep 19th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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