Thursday, December 27, 2012

Herbalife (HLF) - Vol Pattern Emerges as Cataclysm has Ended... For Now...

HLF is trading $10.37, up 3.5% with IV30™ down 7.2%. The LIVEVOL® Pro Summary is below.


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Herbalife Ltd. is a global network marketing company that sells weight management, nutritional supplements, energy, sports and fitness products and personal care products through a network of approximately 2.7 million independent distributors, except in China, where the Company sells its products through retail stores.

For those of you that don't know what's been going on with HLF, suffice it to say the stock was down more than 35% in a few days again when another noted shot-seller bashed the firm on CNBC. Vol exploded to new annual highs and the stock imploded.

I found HLF today stock using a real-time custom scan I built that hunts for calendar spreads between the front two monthly expiries. It turns out, after the disaster of the last few days, the vol has been collapsing of late.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 > 7
IV30™ GTE 30
Average Option Volume GTE 1,200

The goal with this scan is to identify back months that are cheaper than the front by at least 10 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and enough strikes to spread and thus a minimum stock price. I also require a minimum vol level in order to avoid any boring ETFs (or whatever).

The six-month HLF Charts Tab is included (below). The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see the cataclysm that was the last few trading days with the stock falling from over $45 to as low as $24.24.

The vol side is even more interesting. The implied absolutely exploded to multi-year highs, reaching as high as 147%, but has recently been falling quickly as the stock has made a small recovery. This unevenness in the vol has created an interesting phenomenon in the skew.

Let's turn to the Skew Tab, below.

We can see how Jan is elevated to Feb, which in many respects make sense -- the uncertainty surrounding the stock price is hype focused on the short-term after that implosion and therefore Jan vol is elevated to the back. We can also see the monotonicity of the vol levels -- they drop as we go back into further out expiries. The Aug vol levels are back to sort of "normal."

Finally, let's look to the Options Tab (below).

Across the top we can see the monthly vols are priced to 118.69%, 103.59%, 89.26% and 80.83%. This is an interesting one to examine where owning long-term vega could be offset with spread front month extremely elevated vega, and can be done several months in a row. Of course, if the stock moves huge and the position isn't diagonal, that premium paid could turn into a 100% loser. Just an interesting note I thought was worth checking out.

This is trade analysis, not a recommendation.

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