Considering Our Options – Herbalife ($HLF) Aug Put ButterFly

by CC July 30, 2014 2:55 pm • Commentary

A few months ago we made a bearish bet in HLF to try to time Bill Ackman’s own options timetable with the thought that any fireworks in the stock would likely come in August expiration. Fireworks is what we got but not exactly how we imagined. Ackman’s presentation was a disaster for shorts as he didn’t not deliver the “smoking gun”, or as he called it the final nail in HLF’s coffin.

Since last week’s short squeeze the stock is once again approaching the pre-presentation lows, and our trade with less than 3 weeks to expiration is very much back in play:

Screen Shot 2014-07-30 at 12.34.25 PM
6 month chart from LiveVol Pro

To refresh, here’s the original trade from April 29th when the stock was $60 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.


With a little more than 2 weeks left until expiration this trade is right near the long put and what happens next will decide whether we can salvage the trade and possibly even escape with a winner.

Currently the structure is worth about half what we paid and its success or failure is almost entirely based on the deltas contained in the Aug 55 puts (42 deltas). What that means is any dip below 55 in the next week or two needs to be for real or we have no choice to close at a loss. Big moves below mean we can let it run a little as the 40 puts are basically out of play and only have a tiny value because the downside skew is so ridiculous (3 deltas). We’ll watch the stock closely here and pull the plug if it looks like the stock will hold but if she breaks we’ll try to see if we can’t have at least a little profit in the trade.