When Herbalife Ltd. (NYSE:HLF) announced that it had received a civil investigative demand (CID) from the Federal Trade Commission (FTC), most people knew that it was a real possibility (even those who support the company are aware of widespread criticism). But predicting exactly when a probe would start is another matter entirely, which is why a sudden spike in put options before the announcement has people calling foul.

Yesterday, the finance blog Bored with the Noise noticed that there was a lot of activity before the announcement and before trade on the stock was temporarily halted.

Hunting puts with an elephant gun

“Before the Wednesday halt, while the stock was up roughly 5%, there was a flurry of activity in Herbalife Ltd. (NYSE:HLF)’s April options, specifically in near money puts. The trades weren’t subtle either. Somebody was hunting puts with an elephant gun,” says the blog.

Herbalife  puts 0314

To see the difference in activity, he shows the volume of March 55 puts before and after the halt, which is exactly what you would expect immediately after such an announcement – a small, steady jump in activity. This could be bearish investors taking a short position or long Herbalife Ltd. (NYSE:HLF) investors hedging their positions (or both), but it really isn’t surprising.

Herbalife  march 55 puts

What is shocking is the spike in volume for April 55 put options (again, the bump in post-announcement activity isn’t a surprise). If there is another explanation for such a well-timed, concentrated series of trades we’d love to hear what it is.

Herbalife april 55 puts

Herbalife: Too many knew about the CID to jump to conclusions

We know that the FTC probe wasn’t a complete secret because Dan McCrum at the Financial Times knew about it and asked the company to confirm, prompting Herbalife Ltd. (NYSE:HLF) to make the announcement when they did. Herbalife critics might jump on this as proof that the company flouts the law, but that doesn’t seem likely. Even those who take a dim view of the company would have to admit that responding to an official probe by engaging in insider trading would be daft. Ruling out McCrum and the rest of the Financial Times also seems pretty safe.

That leaves any number of state attorney generals, congressmen, even particularly well-connected lobbyists who may have known about the CID. Whoever it was, the brazen purchasing of 11,000 put options in Herbalife Ltd. (NYSE:HLF)  just before the CID was announced is something that should be investigated.