Monday, July 28, 2014

* Herbalife (HLF) - Earnings Preview: We've Never Seen Risk This... Low?

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HLF is trading $66.84, up 1.2% with IV30™ up 10.4%. The Symbol Summary and everything else is included below

Provided by Livevol

UPDATE: 7-29-2014

Provided by Livevol

UPDATE: 7-30-2014

Provided by Livevol

Disclosure: I own puts in HLF expiring on Aug1.

The option market reflected a price range of [$62, $72] and HLF has moved well outside that range.  The risk was in fact priced far too low. The intra-day low HLF reached on the news of Bill Ackman's presentation (i.e. on the announcement of the presentation) was $52.50.

Pardon the brevity of the post, but it's almost earnings time. 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 HLF implied volatility (risk into earnings) is the lowest it has been in the last two-years (see the yellow circles). I am of the thought that HLF stock price moves (right now) totally outside of earnings and rather based on outside influences, i.e. HLF vs Bill Ackman.

I don't think it's a coincidence that HLF had its single largest stock return day ever on the day of Ackman's presentation and I think there could have been foul play.  However, I have absolutely no evidence of any kind, so don't run with that quote.

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$62, $72]
  • 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.

And for the record, here is an ordered chart of HLF stock returns forever as of 7-22-2014 (the day of Ackman's presentation):

Provided by Yahoo! Finance

This is trade analysis, not a recommendation.

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