by Tyler Craig | December 13, 2013 11:56 am
Herbalife (HLF) has had quite the rocket-ship ride in 2013. After plunging to a lowly $24.24 late last year, the global nutrition company has staged an epic comeback. With HLF stock recently blasting to new all-time highs, all that was lost in last year’s precipitous decline has now been recovered.
The recent 11% dip in Herbalife stock appears to be providing an alluring entry point for those looking for more upside in the coming months.
Although some bears might point out the recent failed breakout as a reason for caution, the fact is HLF stock remains above the pivotal 50-day moving average, with multiple support levels looming closely.
Since Herbalife’s uptrend really started heating up in April, it has experienced three major pullbacks of 19%, 16% and 19%. So, while its upward march has been interrupted by the occasional detour, each eventually turned out to be an attractive “buy the dip” opportunity.
Turning our analysis to the options market reveals a few other developments of interest.
For starters, fearful HLF stock investors have been consistently overpaying for protection via options this year. With few exceptions, the implied volatility of HLF stock options has been higher than the historical volatility of the stock. This perpetual mispricing of options has helped pad the pockets of option sellers throughout the year.
The generally high levels of implied volatility in HLF options stands in stark contrast to the depressed volatility levels of options on the S&P 500 Index. While option sellers can’t be all that excited about the CBOE Volatility Index’s (VIX) recent foray into the 12% zone, they can get excited about HLF options boasting volatility north of 65%.
To exploit both the high implied volatility and high likelihood that HLF stock doesn’t completely crater in the coming month, sell Jan 55-50 bull put spreads for 60 cents credit. The position is entered by simultaneously selling the Jan 55 put and buying the Jan 50 put.
The max reward is limited to the initial 60 cents credit and will be captured as long as HLF stock remains above $55. The max risk is limited to the distance between strikes minus the net credit, or $4.40.
To reduce the risk, consider exiting if HLF stock drops below the short strike price of $55.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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