Considering Our Options – Herbalife (HLF): May2 Weekly Put Fly

by Dan May 2, 2014 2:37 pm • Commentary

On Monday on HLF’s Q1 report the company stated that they were suspending their dividend to use the cash to buy back stock this week in an accelerated fashion.   This action caused us to take a decidedly negative view on the stock in the near term as it appears the company is way too focused on squeezing one large short as opposed to mounting a defense to growing scrutiny about their business model.

Currently we have two bearish trades in $HLF, one expiring this week and one looking farther out to August

With time running out on the weeklies (less than 2 hours left), and the stock just above our long strike I am ONLY going to focus now on trading out of the May 2nd 59 puts which are at risk of expiring worthless. In hindsight, the weekly butterfly structure just didn’t have enough time for the buyback to end and allow for weakness in the stock. The August trade is the much better set-up for that thesis. Because only the 59 puts need to be closed to salvage anything from the weeklies, I’m going to see if there’s any intraday weakness inot the close and look to get anything I can for them. Right now they’re only worth about 15c which isn’t worth it but I’ll be quick to trade out of them if we see any bid higher than 25c into the close.

We’ll update if we make a move.




original trade:

Adult Swim Trade Herbalife (HLF): Smoking Herb


HLF reports tonight after the close, and the options market is implying about a 5% one day move.  There was a lot of news in the quarter from the company issuing a billion convert to raise money to buy back stock (at higher levels) to lots of noise about regulation in China and investigations here.  I am generally not a fan of the story and think the company lacks few bullets to squeeze shorts.  Just now, as a bit of a flier I made a defined risk bearish bet, in the weeklies that the stock pulls back to the mid $50s over the next few days:

But with a big caveat, I have no idea what the company is going to do or say to combat all the negative sentiment, so this is a bit of a flier, risking what I am willing to lose and just conceived the trade which is why I am posting so late.

TRADE: HLF ($59.20) Bought the May 2nd weekly 59/55/51 put fly for .60

-Bought 1 HLF May 2nd 59 put for 2.20

-Sold 2 HLF May 2nd 55 puts at 1.02 each or 2.04 total

-Bought 1 HLF May 2nd 51 put for .44

Break-Even on May 2nd expiration:

Profits:  gains of up to 3.40 btwn 58.40 and 51.60, max gain of 3.40 at 55

Losses: up to .60 btwn 51 and 51.60 and then again btwn 58.40 and 59 with max loss of .60 above 59 and below .51

RATIONALE: risking .60 to maybe make 3.40 if the stock is $55 on Friday’s close.  LOW CONVICTION, SMALL TRADE.  Considered 1×2 as it is tough to pay for that wing, the low strike put, but who knows how this thing will trade.  Risking .60 to maybe make 3.40 on a wide range to the downside. not horrible odds in expensive options, which is why I chose a fly.

Here are some of our prior posts on HLF from earlier in the year: