Massive leverage in Herbalife trade
David Russell | [email protected]
optionMONSTER's Heat Seeker tracking system detected a large, complex strategy in the heavily shorted weight-loss company, which was the subject of a famous brawl between investors Bill Ackman and Carl Icahn early this year.
Some 5,000 November 70 calls were bought for $3.20. Equal-sized blocks were sold in the November $52.50 puts for $6.40 and bought in the in November 45 puts for $3.30. Volume was more than twice open interest at all three strikes, indicating that new positions were initiated across the board.
The strategy combines a put credit spread, used to earn income, with long calls. It lowered the cost of the position to just $0.10, creating the opportunity for massive leverage if the stock continues to climb. He or she can also lose a maximum of $7.50 if it drops to $45 or lower because of the short put spread.
HLF is up 4.43 percent to $54.47 in afternoon trading and has risen 11 percent in the last month. The shares faced short-term downtrend between May and early July but then broke resistance and have been running higher since.
Ackman shorted the company last year, raising questions about its accounting, but then corporate raider Icahn defiantly amassed a long position in the name. In a CNBC interview yesterday, he thanked Ackman for making him $250 million of profit on the trade.
Today's bullish trade could also be a hedge on a short position, preventing further losses if HLF goes above $70. If that's the case, the trader wouldn't mind a drop below $52.50 because he or she would profit on the bearish trade in the shares. (See our Education section for more on how to hedge to the upside and downside with options.)
HLF's next earnings report is on July 30. It's beaten for at least the last four quarters.
More than 45,000 contracts have changed hands in the name so far today. That's more than 4 times average daily volume.