Vitamin company Herbalife Nutrition Ltd (NYSE:HLF) has suffered a steep descent off its February peak of $61.77, taking a 45% haircut on its way to a one-year low of $33.62 last week. The stock has rebounded since, up 6.2% so far this month. What's more, on its way down, the security met up with a long-term trendline that has yielded big returns for HLF in the past -- suggesting the equity's lengthy decline may have finally found bottom.
The trendline in question is HLF's 80-month moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, the equity has had seven similar tests of support at this long-term moving average in its lifetime. The stock has been higher three months later after 71% of these signals, and averaged a solid 15.9% return. What's more, most of those returns add up fast -- HLF is 10.3% higher, on average, 4 weeks post-signal (71% positive). From its current perch at $36.56, a similar move would put HLF back atop the $42 area by early December.
Short sellers have already begun to hit the exits, with these bearish bets down 35.5% in the last two reporting periods. The 8.13 million shares sold short still represent a solid 9% of the stock's available float, and nearly four days' worth of pent-up buying power, at HLF's average daily volume. If more bears capitulate to the stock's September surge, continued short-covering activity could keep the wind at Herbalife's back.
Options bears have had an even tighter grip on HLF, with over four puts bought to open for every call over the past 10 days across the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, this ratio ranks in the 89th percentile of its annual range, suggesting a much healthier appetite for bearish bets over bullish of late.
That being said, options are still pretty cheap right now. HLF's Schaeffer's Volatility Index (SVI) of 32% is in the relatively low 30th percentile of its annual range. This means that near-term option premiums are pricing in tamer-than-usual volatility expectations, making now a good time to bet on the stock's short-term direction via options.