HLF, LNG Options – Unusual Trading Activity – December 21, 2012

| December 21, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re taking a look at some very unusual options trading activity in Herbalife (HLF) and Cheniere Energy (LNG).

As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.

This is something professional options traders pay a lot of attention to, and for good reason…

Unusual options activity can “tip off” big moves in a stock, either up or down.

So let’s take a look at some ‘interesting’ activity that caught our eye this week:

Hebalife Options (HLF)

Nutritional supplement company Herbalife (HLF) is experiencing a large amount of option activity this week. And put options are outpacing call options by a wide margin.

HLF finds itself in the crosshairs of hedge fund manager Bill Ackman. The founder and CEO of Pershing Square Capital Management contends HLF is nothing more than an illegal pyramid scheme.

Yesterday, Ackman went public with his findings in a three hour long presentation where he disclosed his company is short 20 million shares of HLF. And his price target for the company is $0.

So far, HLF hasn’t had much to say in response to his claims. Basically they say his finding are wrong. And they will respond in detail on January 7th.

Not surprisingly, HLF’s share price plunged on the news. And option traders bought put options to profit from a further decline in the stock price.

Should you buy put options on HLF too?

If you believe Ackman’s thesis, buying put options is a much better way to short HLF than shorting the stock itself. Remember, owning put options allows you to define the amount of risk you’re willing to take. Whereas shorting the stock comes with unlimited risk.

At this point, investor sentiment toward HLF is extremely negative. And it should continue to put pressure on the stock. But if HLF can successfully refute the claims they’re an illegal pyramid scheme, the stock could snap back in a hurry.

One thing’s for sure, it will be exciting to see how this one plays out!

Cheniere Energy Options (LNG)

Call volume on the Cheniere Energy (LNG) spiked yesterday.

Shares of the first US company to receive regulatory approval to export liquefied natural gas or LNG are currently trading for $18.00. The shares are up nearly 30% since November and are closing in on the 52-week high of $18.92.

According to our tracking system, option traders bought more than 23,000 of the January 2013 $17 calls. The contracts were purchased between $1.47 and $1.80.

The option buyers are clearly looking for LNG to continue moving to the upside over the next month. But that might not be such a good idea…

LNG is a great story stock.

The US currently has a glut of natural gas that is depressing prices. And low prices are forcing many oil and gas exploration and production companies to pull back because they can’t make a profit with nat gas at these prices.

But worldwide demand for natural gas is soaring. It only makes sense to give US energy companies permission to sell their products overseas.

In order for them to transport the gas, it needs to be liquefied and loaded on the special tankers. That’s where Cheniere Energy comes in. They’re the first company to obtain permission to export natural gas from the US in 40 years.

In other words, they have first-mover advantage in the industry.

In fact, they just signed a huge deal with Total Gas & Power. Total will buy two million tons of LNG from Cheniere every year. Clearly, this is an idea that’s time has come.

But Cheniere is still years away from actually producing any LNG. Their liquefaction trains that will produce the LNG are still under construction.

What’s more, LNG is dealing with a troubling technical setup. LNG’s chart shows that the stock is currently trading just below a strong level of technical resistance. In order for LNG to continue its strong performance, it will need to clear these hurdles.

Judging by the past performance of LNG, it will likely fall back to support before it can break out to new highs. And with just a month until these options expire, the option buyers could end up on the wrong side of the short term movements in the stock price.

The bottom line is LNG has a great story. But the bearish technical setup will likely trump the bullish fundamentals in the short run.

More Options Ideas…

That wraps up this week’s unusual options trading and volume…

Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.

We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!

So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!

Safe Trading,

Marcus Haber


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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.