Name That Trade – $HLF Ahead of Company Presentation

by Enis January 9, 2013 3:02 pm • Commentary

Two high-profile hedge fund managers, Bill Ackman and Dan Loeb, both accomplished investors who know each other well, have taken opposite sides on Herbalife.  David Einhorn, another high-profile manager, has been rumored to be involved since he jumped on the company’s earnings call last spring.  Meanwhile, Herbalife’s management team, led by CEO Michael Johnson, has been on a media campaign accusing the short sellers of market manipulation ever since Ackman’s initial announcement.

The media drama has been entertaining to say the least.  And look at the stock.  It’s gone from the low 40’s to 24, and back up to the low 40’s, all in less than a month.  To add to the intrigue, the company will be giving a presentation to investors and analysts tomorrow, presumably offering its side of the story.

What about the options market?

I wrote a long post on Dec. 20th detailing the options activity in the 2 months leading up to Ackman’s presentation.  In short, it looked like some big players had gotten long Dec and Jan13 puts, and then spread those positions by selling lower strike puts on weakness in HLF stock.  Fast forward to today, and the bulk of open interest is still in Jan13 expiry, but open interest has exploded in Feb and May as well, with the majority on the put side.  The largest single trade structure to take place in the past month was on the day after Ackmann’s presentation, when someone traded the May 22.5 / 35 risk reversal, around 15k times, looked like buying put, selling call.  Of course, that could have been someone buying stock against that structure as well.

What has implied vol done in HLF recently?  Here’s a chart of 30 day implied vol (red) and realized vol (blue) over the last year:


Screen Shot 2013-01-09 at 2.40.56 PM



One month implied vol around 80% is clearly near historical highs, but given that the stock is realizing around 100% (6% moves per day, on average), the implied vol doesn’t seem overpriced.  In this context, how do the options look by expiry?

The weekly options are pricing in a 8-9% move for tomorrow’s presentation.  For the $40 strike, Jan 19th expiry volatility is priced at 97, Feb is priced at 83, and May is priced around 70.  That’s some rich premium:  the Jan 19th 40 straddle is priced around $5; the Feb 40 straddle around $8.40; the May 40 straddle around $13.60.

With that backdrop, long premium trades on HLF don’t offer great risk/reward unless you expect a 20%+ move in HLF over the next month.  That’s certainly possible given the stock’s recent action, but I would much prefer trading calendars or butterfly structures given the high option prices.