Friday, April 11, 2014

Herbalife (HLF) - Stock Implodes in 30 Minutes on FBI Investigation of Fraud

HLF closed trading at $51.48, down 14% with IV30™ exploding up 52.5%. The Symbol Summary is included below.

Provided by Livevol

HLF was actually fairing quite well today until about 30 minutes to go before the close when this news came out:

Herbalife Shares Tumble Amid Report of Criminal Probe via The Wall Street Journal, written by STEVEN RUSSOLILLO.

The criminal investigation comes after the Federal Trade Commission last month started its own investigation into Herbalife, a company that has spent more than a year battling hedge fund manager BIll Ackman over allegations that it operates a pyramid scheme.

News of the criminal investigation was reported by the Financial Times. The inquiry may not lead to any charges, the publication said, and Herbalife has not been accused of any wrong doing.

The intra-day Tick Chart for HLF is included below.  The top portion is the stock price (today) and the bottom portion is April volatility (today).

Provided by Livevol

So, basically the news came out and the stock imploded while the implied volatility rose by more than 50%.

The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We all know (right?) the saga between HLF and Bill Ackman's accusations of fraud and his enormous short delta positions (in stock and options).  The stock chart is quite bumpy, but as of today's close, the stock is down ~$20 over the last two-years.

It's interesting that the stock was just starting a little rally from below $50... until today.

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

Provided by Livevol

We can see the IV30™ pop today, but what is rather interesting is how low the implied volatility is relative to that enormous spike in Dec of 2012.  Other than that spike, the implied is actually quite high.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Unlike many instances when a stock plunges on news that barely has time to be digested, HLF actually shows "normal" skew.  That is, the upside potential (risk) is priced less than the downside.  While that's "normal" skew, it's actually "abnormal" after a final hour of trading like we just saw.  I would have expected to have seen parabolic skew (two-tailed risk equally priced).

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Check out the value of the $50 strike straddle in the may 2nd weekly options: ~$9.50.  That puts the range for HLF on expiration (after earnings) in [$41, $59] (ish).  We'll see.. This stock has definitely seen its share of "much-a-do-about-nothing" after what seems like crazy bad news.

This is trade analysis, not a recommendation.

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