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Herbalife Bulls Bet on a Short-Term Bounce

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HLF was hit with heavy call volume as takeover rumors hit the Street.

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It's been an action-packed week for Herbalife Ltd. (NYSE:HLF), with the stock logging some volatile intraday moves. Following Tuesday's 3.8% swoon, HLF recovered yesterday with a gain of 2.9%. Just like the shares, options players have turned on a dime -- after scooping up a new batch of puts earlier in the week, speculators on Thursday set their sights on Herbalife Ltd. calls.

Specifically, call volume on HLF ramped up to roughly six times the norm yesterday, with approximately 60,000 contracts changing hands. (By contrast, only about 15,000 puts were traded.) The center of attention was the April 40 call, where 13,203 contracts crossed the tape -- 81% at the ask price, indicating that buyers drove the bulk of the day's volume. Open interest at this front-month strike surged overnight by 7,300 contracts, so it's safe to assume that new bullish bets were added here on Thursday.

Those April 40 calls traded at a volume-weighted average price (VWAP) of $1.46, which means that Herbalife bulls need the stock to rally above breakeven at $41.46 (strike plus VWAP) before the closing bell sounds next Friday, April 19. The stock settled Thursday at $38.28, so traders are looking for the shares to gain more than 8.3% over the next week.

In today's trading, HLF is resuming its roller-coaster price action. The equity is down 1.6% out of the gate, paring a portion of the previous session's gains. On Thursday, an SEC complaint revealed that KPMG's Scott London, currently accused of insider trading, told a friend in February that Herbalife might be looking to go private.

This article by Elizabeth Harrow was originally published on Schaeffer's Investment Research.

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