Considering Our Options – $HLF

by CC February 5, 2013 11:45 am • Commentary

What a crazy stock. With HLF having rebounded from its open under 31 yesterday to about 36.50 as I write this (don’t blink) it’s time to look at possible exit strategies and the potential of the calendar trade. Yesterday morning Dan nearly threw in the towel on the trade as it looked like we were just too cute for our own good.

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.

As Dan mentioned, the reason we initiated the trade as a calendar was the fear of sticking our necks out too far from a premium perspective.  But with the stock still within range of that 40 strike the trade still has a lot of potential.

Basically, our sweet spot is 40. If the stock continues to rebound here we’ll take a look at our options as close to our Feb short strike as possible. We had a similar trade recently in STZ which collapsed under the weight of its own related rulings with the Feds. We got a chance to take that off on a rebound and that turned out to be fortunate.

We still have a bearish bias on this stock as we think the battle between negative headlines and short squeezes still favors the negative headline possibilities. But we also think between headlines the stock could drift higher. Spreads in the options remain wide so execution risk remains in this wild stock. But with the stock here we have a slight winner, one that could become a more substantial winner with any drift higher in the stock.