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Credit Spread – Herbalife (HLF)

HLF has an intriguing (and possibly profitable) technical setup


Now that winter is slowly fading away, it may be time to get back to being active and working out. Here is a trade idea on a company that can make you look great while you try to lose those inches and possibly increase the size of your portfolio.

Herbalife Ltd.  (HLF): Call Credit Spread

The trade: Sell the June 46/48 Call Credit Spread (selling the June 46 call and buying the June 48 call) for 45 cents or better.

The strategy: The maximum potential profit for this trade is 45 cents if HLF is trading below $46 at June expiration. Both call options would expire worthless. The maximum loss is $1.55 ($2 – 45 cents) if HLF is trading above $48 at June expiration. Breakeven is $46.45 at expiration based on a 45-cent credit.

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The rationale:
To be honest with you, I didn’t even know Herbalife was still alive and kicking until a couple of years ago. It seems like years and years ago you would see the company’s logo on distributor’s cars every so often and I really haven’t seen them since. Herbalife is a network marketing company that healthy meals, various nutritional products and personal care products globally. The company has disappointed investors more times than not over the last couple of earnings based on the stock moving lower afterwards. It was just recently revealed that a hedge fund sold over $3 million of HLF stock in the first quarter.

But what really makes this trade idea interesting is the stock’s chart and the implied volatility of the options. The stock is currently trading at a resistance (previous pivot highs and lows) area right around $45 which might keep the stock from moving higher. Only back in January was the stock able to close above that level even though it has tried several times including recently. If it can’t do it relatively soon and close over resistance, it might just head lower and help this credit spread out. The implied volatility of the options are currently above historical levels meaning they are priced maybe a little bit higher than normal which is a good thing for a seller of premium like in this example. Herbalife needs to disappear from the $45 area just like their logos have disappeared from car’s bumpers and windshields.

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