Herbalife after the January option expiry: Part 1

I have deliberately refrained from writing about Herbalife until the 17 January 2015 option expiry.

We know from public disclosures that Pershing Square (PSQ) had a huge put option position on Herbalife.

There were also a vast number of put options that expired on 17 January.

Here are the outstanding in-the-money put contracts as at market close Friday.

	issue	open interest
31.5	HLF150117P00031500	1,174
31.5	HLF150130P00031500	1
32	HLF150117P00032000	974
32	HLF150123P00032000	34
32	HLF150130P00032000	31
32.5	HLF150117P00032500	5,318
32.5	HLF150123P00032500	59
32.5	HLF150130P00032500	26
33	HLF150117P00033000	677
33	HLF150123P00033000	116
33	HLF150130P00033000	137
33.5	HLF150117P00033500	125
33.5	HLF150123P00033500	276
33.5	HLF150130P00033500	12
34	HLF150117P00034000	206
34	HLF150123P00034000	23
34	HLF150130P00034000	13
34.5	HLF150117P00034500	20
34.5	HLF150123P00034500	78
34.5	HLF150130P00034500	63
35	HLF150117P00035000	13,729
35	HLF150123P00035000	79
35	HLF150130P00035000	39
35.5	HLF150117P00035500	168
35.5	HLF150123P00035500	35
36	HLF150117P00036000	2,096
36	HLF150123P00036000	2
36.5	HLF150117P00036500	190
36.5	HLF150123P00036500	2
36.5	HLF150130P00036500	18
37	HLF150117P00037000	481
37	HLF150123P00037000	135
37.5	HLF150117P00037500	7,446
37.5	HLF150123P00037500	248
37.5	HLF150130P00037500	8
38	HLF150117P00038000	119
38	HLF150123P00038000	7
38	HLF150130P00038000	47
38.5	HLF150117P00038500	17
38.5	HLF150123P00038500	41
38.5	HLF150130P00038500	2
39	HLF150117P00039000	22
39	HLF150130P00039000	7
39.5	HLF150117P00039500	25
39.5	HLF150130P00039500	10
40	HLF150117P00040000	20,202
40	HLF150123P00040000	16
40	HLF150130P00040000	6
40.5	HLF150123P00040500	4
41	HLF150123P00041000	3
42.5	HLF150117P00042500	7,563
43	HLF150117P00043000	1
44	HLF150117P00044000	11
44	HLF150123P00044000	11
45	HLF150117P00045000	18,770
47	HLF150117P00047000	21
47	HLF150123P00047000	1
47.5	HLF150117P00047500	9,611
50	HLF150117P00050000	73,611
52	HLF150123P00052000	2
52.5	HLF150117P00052500	27,058
55	HLF150117P00055000	16,754
55	HLF150123P00055000	11
57.5	HLF150117P00057500	7,597
60	HLF150117P00060000	43,836
62.5	HLF150117P00062500	3,173
65	HLF150117P00065000	27,343
67.5	HLF150117P00067500	957
70	HLF150117P00070000	13,127
72.5	HLF150117P00072500	638
75	HLF150117P00075000	1,373
77.5	HLF150117P00077500	184
80	HLF150117P00080000	9,981
82.5	HLF150117P00082500	892
85	HLF150117P00085000	43
87.5	HLF150117P00087500	109
90	HLF150117P00090000	2,329
95	HLF150117P00095000	263
100	HLF150117P00100000	5,276
105	HLF150117P00105000	172
110	HLF150117P00110000	115
115	HLF150117P00115000	51
120	HLF150117P00120000	69
		325,520

They add up to 325 thousand contracts outstanding representing 32.5 million shares.

These options expired on Saturday morning and I presume that the stock has been delivered.

The delivery of these options may have a profound effect on the Herbalife share register. These effects will be part of this series. For reference there are less than 82 million basic shares outstanding and about 91 million diluted shares. However basic shares are the right comparable because delivery has to be effected through basic shares outstanding.

It was generally assumed that these options belonged to PSQ.

Bill Ackman however has issued a denial. To quote:

To set the record straight, 97% of the Herbalife put options owned by Pershing Square have been extended and have expiration dates up until 2016.  The January put options held by Pershing Square have a strike price of $US65 share. Pershing Square may choose to extend, sell or exercise the January put options depending upon market conditions and other factors.

Those in the know have understood that the options expiring on 17 January were not PSQ's options.

PSQ's option position in Herbalife is an off-market position.

I know the contract terms as do many others.

Some of the strikes are very unusual.

They include 44,362 call contracts [which I presume hedge a short position] expiring on 17 April with the very unusual strike price of $69.99. [The contracts represent 100 shares.]

They also include puts expiring 15 May, 11,550 contracts with a $44.50 strike and a further 19,500 contracts with a the unusual $49.99 strike.

There are a further 25 thousand contracts for calls with another $69.99 strike.

I could go on... and on. Ackman's position is well known amongst connected and sophisticated longs.

Moreover like many things that Bill Ackman says he is being cute-with-the-truth. Bill said his "puts" largely didn't expire on 17 January. He however owned a large number of calls that expired - and these calls hedge the oversized short position. For example PSQ carried 4,375 call contracts that expired this weekend with a strike price of $89.90. Presumably these hedged 437,500 short positions.

I wouldn't bother disclosing that I knew details of PSQs unlisted positions except that it is useful in future posts.




John

Post script: If you (like me) believe that Herbalife is a legitimate business and (like me) you believed that the end game was a private equity bid - then I have a puzzle for you.

How could you - knowing the detail of Bill Ackman's position - make a simply humungous amount of money at least partly at the expense of Pershing Square and their clients? Because I assure you some people want to play rope-a-dope with Mr Ackman. [If you think that Carl Icahn has really suddenly become Bill Ackman's bosom buddy then you don't know Carl...]

Secondly: I suspect that this post will cause Pershing Square's office to be quiet and unusually tense on Monday.

Can you say witch-hunt?

Sure, I knew you could.