Here's what happened via CNBC.com on 1/17/2014:
Incredibly, even with Herbalife's 10 percent plunge on Thursday off a Chinese investigation into fellow multilevel marketer Nu Skin, shares still need to drop another 40 percent within a year to make the trade profitable at expiration.
On Jan. 9 at 2:50 p.m. ET, 25,000 of the January 2015 50-strike puts in Herbalife were bought for $7.25 each; at about the same time on Jan. 10, 20,000 more were purchased for slightly less.
CNBC's Dan Nathan thought it could have been a dealer hedging OTC puts sold to hedge fund manager Bill Ackman (related post: "Bill Ackman: "In My Career, I Have Not Seen a Less Attractive Risk-Reward Ratio Than a Long Investment In Herbalife Common Stock at Current Levels.").
The long-dated, way-out-of-the-money puts could suggest that Ackman is adding to the over-the-counter put position and the dealer that sold it to him is hedging the position in the listed market, or there is a new entrant on the bear case," commented Dan Nathan, an options trader who writes at RiskReversal.com.
And here's what's happened to Nu Skin ($NUS) via CNN on 1/17/2014:
Shares of Nu Skin were down again Friday and have fallen more than 40% this week after Chinese state media accused the beauty products marketer of running an illegal pyramid scheme in the country.
The allegations were published Thursday by People's Daily, a Communist Party mouthpiece, in a story that promised to expose how Nu Skin "weaves its lies."
As you can see, Nu Skin's stock crashed. But if you look back a year on the chart, $NUS was up over 200% before it crashed (and +375% in 3 years). So the news was the catalyst that corrected the exhausted stock.
As of 9/30/2013, less than ten large funds each owned $100 million-$1 billion of Herbalife's stock, so the put action could have been protecting against a severe correction in the stock. These hedge funds could all dump their HLF shares at once and drive the stock down significantly if they wanted to. Or maybe hedge fund manager Bill Ackman was adding to his short, who knows. *On December 30, 2013, when HLF was trading at $77, S&P Capital IQ downgraded HLF to "sell" with a $75 price target (even with a share buyback). On Friday HLF closed at $70.20. Nice call.
Pyramid scheme or not, since markets and business cycles still go up and down (I think), Herbalife would still get crushed if consumption and global economic growth slowed down, which would pull the rug under its pyramid-type sales structure. So will $HLF end up like St. Joe Co. ($JOE) and fail to get bought out? Or will Post Holdings' CEO Bill Stiritz and other billionaire owners actually be part of an LBO that puts the shorts out of their misery. HLF is starting to poke holes through its weekly uptrend line, so keep an eye on that technical risk.