Is Bill Ackman thinking his battle with Herbalife Ltd. (NYSE:HLF) might become a more protracted ordeal?
Bill Ackman: Herbalife’s option trading
CNBC’s Scott Wapner notes heavy options trading in the January $50 put on Friday and then, citing an unnamed options expert as a source, attributed the buying to Ackman.
“Whoever made that trade – and I’m told that person could be only one person – just rolled out their bearish bets for a full year,” Wapner said. “And he even committed a lot more capital, around $50 million, to that view.”
If in fact that person, “who could only be one person,” as Wapner stated, pointing to Ackman, importantly rolled the options forward. Ackman, in an e-mail to Wapner, declined to comment.
The background is that a large options trade in January, 2014 was attributed to Ackman earlier in the year. The trade engaged in the purchase of $50 put options that expired in a year, January of 2015, indicating that the buyer of the puts was expecting the stock price to move lower before January of 2015.
If recent reports are accurate, that same individual on Friday sold the $50 January 2015 puts and purchased $50 puts one year forward, January 2016. This would indicate that, as Wapner asserts, the trader was looking to “buy time.”
Herbalife’s options contract time dynamic
The interesting product features of derivatives is they can better provide clues to a trader’s motivations than can just single stocks. For instance, the time dynamic in the options contract in the Herbalife Ltd. (NYSE:HLF) trade indicates the trader doesn’t indicate the trade scenario will conclude by January 2016.
Translating this further, the reason one might want to “buy time” is that Ackman is, once again found operating so close to the regulator’s gray area, descrambling the regulatory investigation might be expected to last longer? Regulators are considering if Herbalife engaged in illegal activity, which Ackman alleges. That is outcome of a longer investigation is speculation that is not as clear as the implication that the spread trade in question indicates a desire to have an additional time cushion.
This person appears to be increasing their conviction that Herbalife Ltd. (NYSE:HLF) will fall over the next 12 months, assuming that it can be documented the trader of both trades in question is Ackman. Based on the size of the trade, it must be a large trader. Using logic to connect the dots, assuming the option trade is a smaller percentage of a larger diversified portfolio, the size of the portfolio would mean it can only be one of a handful of the largest hedge fund traders, Ackman among them.