Herbalife Ltd. (HLF) Puts the Pressure on Shorts

Herbalife Ltd. (NYSE:HLF) is extending last week's rally -- with some suggesting a short-squeeze situation is underway -- and was last seen 6.7% higher at $44.91, making it one of the largest gainers on the Big Board. The upside has sparked a rush of call activity in the equity's options pits, with the contracts changing hands at almost five times what's typically seen at this point in the day. Meanwhile, traders are showing an increased appetite for short-term options, per HLF's 30-day at-the-money implied volatility -- which is up 10.7% at 78.7%.

Drilling down, the security's April 80 call has received notable attention, and it looks as though a number of new long positions are being initiated here. By buying the calls to open, speculators are betting on HLF toppling the $80 mark by the close on Friday, April 17 -- when front-month options expire. Of note, the equity hasn't traded north of $80 since January 2014, when it topped out at an all-time peak of $83.51.

Expanding the scope reveals call buying has been growing in popularity this month -- a time frame which has seen HLF surge 45%. Since the end of February, the security's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio has risen to 1.47 from 0.60. What's more, the current ratio ranks in the 93rd percentile of its annual range, meaning calls have been bought to open over puts at a faster clip just 7% of the time within the past year.

As suggested, though, HLF is a highly shorted stock. In fact, roughly 40% of the equity's float is sold short -- representing more than two weeks' worth of pent-up buying demand, at average daily trading volumes. So, not only is there ample sideline cash available to help fuel Herbalife Ltd.'s (NYSE:HLF) fire, but it's also possible some of the recent call buying could be a result of short sellers hedging their bearish bets against any more upside.