MorningWord 2/4/13: Too Cute For Comfort – $HLF

by Dan February 4, 2013 9:00 am • Commentary

MorningWord 2/4/13:   As a trader, I make my fair share of mistakes, usually not the same one over and over again, but often times it takes a few attempts to break a bad habit   A week ago Friday, while Bill Ackman and Carl Icahn were duking it out on CNBC (below) over their opposing views/positioning on HLF (among other things), my sense was that the spike in short dated implied volatility offered an opportunity to sell Feb to own options in March expiration that would include HLF’s next quarterly report.  I bought a Feb/March 40 Put calendar when the stock was ~$44.50, and my play was that the stock would remain btwn the high 30s and the mid to low 40s btwn then and Feb expiration.

And here is the mistake, using options to get too cute trading a potentially binary event where the timing is uncertain……….this morning, the NY Post is reporting that the FTC is looking into HLF’s sales practices, which is a main tenet of the Ackman’s short thesis.   My cynical predisposition and Ackman’s very public accusations against HLF led me to side with his bearish argument, yet the fact that Ackman is short nearly 25% of the float made me nervous to commit capital to an outright short position. Outright put purchases would have been very profitable in hindsight.  IN the  trade that I put on, I sold the Feb 40 Put at 1.20 to buy the March 40 Puts for 2.70.  The Feb 40 Puts closed Friday at 5.50 and they will be worth a heck of a lot more this morning with the stock trading ~$32 in the pre-market.

Hindsight is obviously 20/20 and if I had thought the stock had the potential to drop 30% like a rock in less than 2 weeks,  I would have obviously bought puts or put spreads, or sold call spreads, and for the most part the trade that I chose offered a much higher probability of success.  I have said it before in this space, trading is hard, and sometimes those of us who use derivatives of the underlying make it harder than it needs to be, but the longer I do this the more interesting the trading opportunities become, aside from just being long or short.  Stay tuned for a trade update on how I manage this trade.