$HLF – Big Options Activity Looking for Herb to Get Smoked

by Enis January 16, 2014 11:18 am • Commentary

Bill Ackman has been designated the Big Loser in the HLF battle with Carl Icahn last year. HLF hit a new all-time high in late 2013, less than a year after Ackman first laid out his short thesis on the stock.

Ackman is not known for backing down (see MBIA last decade), and he’s remained insistent that he will eventually make money on his HLF short.  He did note that he had restructured his short position into an options position rather than his previous outright short stock trade.

Well, in the past week, we’ve seen a flurry of activity in the Jan15 50 puts in HLF.  First, on Thursday, January 9th, the Jan15 50 puts traded 25k times at 7.25 (mentioned in our Friday TMO post).  The same line traded another 20k times at 7.10 on Friday, January 10th (also mentioned, in our Monday TMO).  The Jan15 50 puts now have the most open interest of any strike in HLF, at around 50k in total.

We view those trades as likely related to Bill Ackman’s position.  While it’s not likely that Ackman himself would trade listed options (he likely traded Over-The-Counter or OTC options with a bank dealer to conceal his position size and strike), those trades could be the bank dealer trying to offset some of the Ackman position risk in the listed options market.

Despite the rise in HLF stock, 1 year implied volatility has remained near its highs.  Last week’s activity in the Jan15 50 puts took place for elevated premium as a result, with a break-even on those puts of around $43, almost 50% lower from the stock’s recent all-time high set at $83.51 last week.  Here is the chart of 1 year implied volatility:

1 year implied volatility in HLF, Courtesy of LiveVolPro
1 year implied volatility in HLF, Courtesy of LiveVolPro

Over 60% implied vol for a 1 year option is quite elevated for any stock, but Ackman’s put ownership is one big reason why this is skewed so high.

The Herbalife story has gotten more intriguing in the past week as a result of breaking news on Nu Skin, another multi-level marketing company.  Nu Skin is focused on skin-care and nutritional products.  The Chinese government announced overnight that it is investigating the company after the People’s Daily said the company is operating a “suspected illegal pyramid scheme.”

Nu Skin has a direct sales license in China and the country comprises about 25% of revenues. The Chinese government has historically been more stringent on multi-level marketers.  The news this week has sent the stock down more than 30% in 2 days:

NUS weekly, 50 week moving average in pink, Courtesy of Bloomberg
NUS weekly, 50 week moving average in pink, Courtesy of Bloomberg

The stock’s weakness has hit HLF, which is down almost 10% this week.  China is an important growth market for HLF as well.  Ackman has surely been badgering regulatory agencies around the world about Herbalife’s operations, though so far with little success.  Whether the Nu Skin investigation is just the start, or a one-off with no impact on HLF could determine the viability of those Jan15 50 put options over the next year.