Considering Our Options – $HLF: I can feel the soil falling over my head

by CC July 21, 2014 2:57 pm • Commentary

The Herbalife story is about to get a lot weirder as Bill Ackman has scheduled a live webcast tomorrow morning at 10:00 am EDT to lay out his findings from a two year long investigation into the company’s business practices. Whitney Tilson (in his own words) posted recently on Valuewalk and teased the presentation as “the latest nail to Herbalife’s coffin”: (h/t BI)

“Bill Ackman will be adding his latest nail to Herbalife’s coffin in a webcast at 10 am on Tuesday (available at herbalifepyramidscheme.com), where he will reveal what he’s found after a nearly two-year probe of Herbalife’s nutrition clubs (of which there are 3,000 in the NY area alone!). If history (and Herbalife’s reaction) are any guide, it should be a doozy. Whether or not you have a position (as I do – it’s one of my largest shorts), this webcast is a must-watch as Ackman’s presentations are always a tour-de-force (rivaled only by David Einhorn’s). To be clear, they’re both not always right, but: a) they’re right a lot more than they’re wrong, as their track records show; and b) if you want to see what incredible in-depth research and analysis look like, look no further,”

The latest focus from Ackman seems to be on these nutrition clubs which he feels are “a pyramid within a pyramid” of the overall HLF story.
Ackman appeared on CNBC earlier and said this:

“We have hundreds of hours of internal video, Ackman told CNBC’s Halftime Report. “We have some internal documents that were given to us by some employees.”

“This will be the most important presentation that I have made in my career,” he said. “We won’t disappoint.”

That appearance caused the stock to drop mid day today and as it stands now the stock is down about 10 dollars from very recent highs. Our trade is still in play here, expiring in August. To recap, here’s the original trade and the rationale:

TRADE: HLF ($60) Bought the August 55/40/25 put fly for 2.50

-Bought 1 August 55 put for 6.30

-Sold 2 August 40 puts at 2.15 each or 4.30 total

-Bought 1 August 25 put for .50

Break-Even on August expiration:

Profits: gains of up to 12.50 btwn 52.60 and 40, max gain of 12.50 at 40

Losses: up to 2.50 btwn 25 and 27.50 and 52.50 and 55, with max loss of 2.50 above 55 and below 25

RATIONALE:  HLF implied volatility is still relatively high (likely since Mr. Ackman owns so many puts), so we wanted to use a put fly rather than a put spread to cheapen the premium on a bearish view.  We went out to August to give us more time.  Finally, we chose the strikes because HLF’s main support level is $40, which is near where the stock was when Mr. Ackman first announced his short position more than a year ago.

The position is a very small winner here, and is right on the precipice of being a really nice trade… or a loser if this sell-off is another head fake and Ackman only says things tomorrow that we already know.

With that in mind we will treat tomorrow’s presentation is the main event for this structure (earnings are 7/28 but typically are not the big stock mover like the Ackman/Icahn chess match) and we will see if Ackman has the goods. If he doesn’t and the stock has a bounce we will likely try to take the trade off for a small loss. If Ackman freaks investors out, we have a lot of room to the downside to let this trade run, and probably wouldn’t even think about taking profits until at least $50 in the stock.