Herbalife: Vol Pops, Stock Drops, What's Next?

Herbalife Ltd. (HLF) 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.

This is a vol note, specifically rising vol as the stock dips. But even as the implied has risen, it's still depressed to its own history. More on that in a sec.

I found HLF using a custom scan searching for names where IV30™ is up at least 10% on the day. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The 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 it's pretty hard to miss the collapse in late Apr / early May. From 4-30-2012 to 5-15-2012. The stock dropped from $70.32 to $42.44 or 40%. The next day, the stock popped to $49.51 (~+17%), only to drop again to $44.58 the day after that.

The news surrounding HLF oftentimes surrounds their distribution channels / distributor groups and maybe more importantly, how noted short seller David Einhorn has his eye on them. Here's a quick snippet from an article by The Motley Fool on 5-1-2012:

What: Shares of nutrition products specialist Herbalife (NYSE: HLF ) weren't looking very healthy today as they fell as much as 26% in intraday trading.

So what: With an earnings-release title that read "Herbalife Ltd. Announces Record First Quarter 2012 and Raises 2012 Earnings Guidance" you wouldn't guess that it'd be such a rough day for Herbalife shareholders. To be sure, first-quarter earnings per share did manage to impress. The $0.88 that the company reported bested the $0.81 that analysts were looking for.

Now what: But forget about all of that for a moment, because what really had investors shaking in their boots today was the fact that famed short-seller David Einhorn materialized on the Herbalife conference call and started asking management some very pointed questions. One specific area of inquiry was why the company had stopped breaking out its distributor groups -- something that it'd done prior to the recent annual filing. The market's assumption seems to be that if Einhorn is on the call asking those types of questions then he's either building a short case against the company, or else is already short. -- Source: The Motley Fool via Yahoo! Finance; Why Herbalife's Shares Got Crushed, written by Matt Koppenheffer.

Since that incredible ride (mostly down), the stock has actually found a bit of a quiet period. HV20™ has dropped from nearly 120% to now just 24.16%. but then, there's today...

On the vol side, we can see how elevated the implied got during that Einhorn scare, then dipped and rose into earnings (which is normal). All looked calm until today.

We can see how the IV30™ has spiked today and in fact, the front month (1 day vol) has risen even more. The 52 wk range in IV30™ for HLF is [26.80%, 98.06%], so the current level is still just in the 26th percentile (annual). The thing about the move today is, I can't find any news... Scary...

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

Red represents the weekly options expiring in a day, yellow the Sep28 weeklies and green the Oct monthly options. Ultimately there isn't a lot going on with the skew -- that sharp upward bend to the OTM puts is just a nickel bid in the Sep 45 puts.

Finally, let's turn to the Options Tab for completeness.


Across the top we can see the vols are priced to 48.98%, 40.08 and 45.585 for Sep22 weeklies, Sep28 weeklies and Oct monthlies, respectively. Ultimately the vol rise and stock drop caught my attention when I realized that IV30™ was still in (near) the bottom quartile in a name that can gap hard on "almost" news.

Disclosure: This is trade analysis, not a recommendation.