Shares in Herbalife (HLF) were halted at $68.30 on Wednesday before the company said it had received an inquiry from the Federal Trade Commission (FTC). The company stated it welcomed the inquiry in the face of much confusion in the marketplace surrounding its business practices. Herbalife reiterated its confidence that it remains in compliance with all applicable laws and regulations. The following charts compare the before and after Probability Distribution implied by options expiring March 21, 2014. The level of implied volatility surged from 50% to 99% with the downside range expanding from $50 by next week’s expiration down to $30.00. Ahead of the halt only 25,000 contracts had traded on Herbalife and within 15-minutes the tally had risen to 57,000. Shares have reversed a 2% gain to stand down 10.5% at $58.94.
Chart 1 – Before – Herbalife March 21 options implied a range of $50 -$85.00
Chart 2 – After – Volatility doubled, while the downside range expanded to $30.00