Thursday, January 22, 2015

Herbalife after option expiry - Part II: counting shorts and longs

With Herbalife at $31 then any puts that Ackman has (and we know the prices of them) are in the money so far that their delta is almost one.

This means if you have written a (say 100) put options to Bill Ackman and you are hedging your position you are short almost 100 shares.

If you are not short 100 shares then the puts will be exercised on you and you will wind up long 100 shares.

And if you have written 10 million puts (100,000 contracts) and you are not hedged you will wind up owning 10 million shares.

And if you take delivery of five or more percent of a company it likely you have some intentions towards it.

You may however own them deliberately (selling puts with the hope they are delivered) or accidentally (selling puts with the hope of keeping the premium).

Indeed it likely there is some deliberate and some accidental ownership of the stock.


We also have some idea of the size of Ackman's position. It was originally in excess of a billion dollars and between 20 and 25 million shares.

We know from various articles at the time his break-even was around $50. [This was corrected to $47 later as you will see.]

As the stock went up he restructured his position - some short, some puts.

In February 2014 he said that his position was much bigger than originally. To quote:
“We actually now have a much larger position notionally than we had initially. If it were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation.”
We also have an idea of where his break even currently is. Recently he told Reuters this:
"We shorted it at $47 but because of option premium, borrowing costs, dividends, investigative expenses, our break even is around $31, $32," 
You can do the maths. If it was a billion dollar position at $47 per share (and we know it was at least that) he was originally short 21.3 million shares.

His break even is now say $31.50 per share and he will make more money than originally - which means he is short at least 32 million shares (which produces the same result) and probably more than 40 million shares (which is what is required to make this a "much larger" position than originally.

My figuring is that Ackmans short plus put position adds up to something greater than 40 million shares. My guess is 42 million.


Now Ackman has many followers. There is Whitney Tilson (who is publicly short) and a host of Twitter gliterati who boast about being short. It is a fair guess that in aggregate they are short (say) 3 million shares.

This makes an aggregate short position of 45 million. This includes straight shorts plus puts.


The published short position is about 30 million.

As a conclusion we can guess that something like 15 million shares are not delta hedged.

Those puts are issued by someone who is going to take (or has taken) unhedged delivery of 15 million shares.

Given the number of puts exercised on Friday I suspect they have largely taken delivery.


Some of those shares are going to be delivered accidentally. The person sold puts in the hope they would not be delivered and when they are delivered they just sell the shares. This creates downward pressure on the stock. I think we saw that on Monday.

Some of those puts are sold by someone willing and able to take delivery. And most importantly wanting to take delivery.

Normally a new large shareholder has to disclose ownership at ten days (and that would be ten days after they take delivery).

And there must be some new fundamental long (or more than one) who sold those puts to Ackman. People sell a few million dollars of premium for speculation - but someone has taken delivery of hundreds of millions of dollars worth of shares - and in my experience they don't do that by accident.

We have had the first disclosure today - and it was a gentle one. UBS owns 6.4 percent.

I still think there will be another person. At least that is my count.


PS. There was a serious correction to the original version of this post regarding the ownership of the UBS stake.


Anonymous said...

There is no "hiding". Where do you come up with this stuff? The filing clearly identifies UBS and a few of it's subsidiaries as the owners. Bloomberg has an itemized listing. Put the stubbornness aside for one brief moment and ask yourself one question...what legitimate business would issue unlimited distributorships (franchises)without any restrictions such as geographic concentration AND AT THE SAME TIME be willing to sell to potential retail customers of those distributors interested only in product for their own consumption at a significant discount? Spend some time pondering that instead hoping for a squeeze...hope is not an investment or trading strategy. It is, however, what this company feeds on to the detriment of many and benefit of few.

John Hempton said...

Corrected as per comment. My count is that there will be one more long holder.

Anonymous said...

Buy it up, John! Hope you go long. WAY WAY long!

Anonymous said...

Thanks for the correction. Onward...yes, there are lots of "long holders"...every share sold is bought, right? Every share in the float is owned by someone at all times, right? It's not a revelation that ownership is shifting in any public company all the time. Since you didn't want to answer the question about unlimited franchises, let me try another approach. Lets say you developed a terrific new protein powder and wanted to start a business to produce and sell would you do that? How would you price it? How would you advertise, market and distribute it? Picture the business plan in your honestly, does it look anything like HLF or Vemma or NUS. Would you ever structure your distribution like these companies if you had a serious product to sell that you believed in? How many salespeople would you want to have in Sydney before you concluded that they might be overlapping and competing with each other? How many in Perth and any other city you wanted to sell in?

Anonymous said...

Why would John spend this much time on a painful position? He had so much success exposing the frauds that existed, that's what he should go back to doing - it's what he does best.

I'm guessing he's caught up emotionally a bit due to being on TV discussing HLF, initially being absolutely correct (as communicated by the stock market pricing mechanism) and his pride since he wrote a lot about it. This is not about right and wrong, this is about money and John made far more by discussing frauds.

I'm guessing someone has scared John into dropping his freedom of expression, in this case - freedom to report on non-western country frauds.

Anonymous said...

I have absolutely no idea whether you are right or wrong (and only buy and sell the occasional ASX listed stock or ETF) - but I love reading your blogs and I'm amazed at the vitriolic anonymous messages you seem to get from the shorts... none of whom seem to be picking apart your argument in the blog - just railing against your long position in general.

Anonymous said...

Well John has been pretty upfront that the product is not protein but the community support.

Anonymous said...

I might structure my fictitious protein powder company as an MLM. It seems to have had some success. Just saying.

Anonymous said...

As one that ever so occasionally drops in to this site (one of twenty bookmarked under "market noise"), I really am just shocked by how thin the analysis is. The blog on Northern Oil's management was the last new low.

As the last post rightly pointed out, every share sold is bought ... so what is your point here John? Given the obvious sold/bought notion, shouldn't a more worthy question be at what price is this being done at or could/will be done at? That would be far more interesting than just point out like a broken record what an option exercise involves. Nothing which my trusty Brearley Myers "Principles Of Corporate Finance" wouldn't have been able to spell out!

"Indeed it likely there is some deliberate and some accidental ownership of the stock." .. ummm no sh*t sherlock....

Anonymous said...


Unknown said...

You miss the fact the presumably many of the puts would be part of strategies like put spreads which, if both legs in the money, would require no action. The net delivery is probably a fair bit smaller

J said...

Maybe it's all just short positions taking some profits (via put expiry) and counterparties having to go long for a bit. Surely some of Ackman's counterparties are sometimes pretty big (like UBS big?).

The PM said...

Maybe I'm super dumb, but I'm not entirely sure what the follow through outcome of the article is.

If a bank (UBS) wrote Pershing Square some puts, they typically manage it actively over the course of the life of the trade in the market, or they have offloaded the risk on another in.

Anyway, if you're correct, there's an unwilling holder of the stock and they typically have to drip this out over the next month?

John Hempton said...

Dear PM. If UBS wrote Ackman puts they would want to be SHORT to hedge the position.

They are long. And it is the investment bank - and I don't think they are taking the risk of being long - do you?

The PM said...

John, I see what you're saying. There's 2 parts to answering this puzzle.

1) Puts like this are actively managed by the bank. There is zero chance they take the risk (this large), especially post GFC where risk books have been massively reduced.

This means that the trade (from UBS's point of view) will be managed over the course of the exposure. Typically this is delta managed so that the net delta exposure is ~ 0.

From a markets point of view, this means that the put position initiated by PSQ largely flows through into the market as UBS short into it (or sometimes buy back as may be the case) to manage the delta.

2) The reason they are long is because maybe they did take some risk on their book (managing via on a portfolio basis may mean you can take some stock specific risk, although 15m shares seems large for one position).

So what may have happened is PSQ exercised, and put the stock to UBS. They are now holders because they took the other side of PSQ trade to some extent.

Given banks' risk appetite these days and so forth, it is unlikely they will hold for prolonged periods of time and will seek to actively manage that risk down.

They may do this by selling on market or they may have already offloaded the risk to another counterparty so they just clip the ticket on the vol spreads/commissions.

I haven't looked at the nature of the UBS position, but sometimes obviously we need to be careful in interpreting it. It may be just a 'nominee' / 'trust' account and the underlying holder is actually say an insto who is happy to be long HLF.

If it's a long only guy who's happy to hold the stock, this is the best scenario for HLF as they prob received premiums for selling PSQ the puts and they're happy to own HLF anyway.

Am I missing anything else?

Some Guy said...

The fact that it is UBS with the long position seems to be evidence against a well-thought out long investment considering their track record.

Anonymous said...

EBAY - I just searched "Herbalife" on Ebay. There were 10,416 "results for Herbalife". Of those, 240 were "auction" listings and 10,252 were "buy it now" listings. I sorted the auctions by "ending soonest" and the next 5 items to see their auctions close have received no bids.

Anonymous said...

Amazon - I searched "Herbalife" on Amazon and got 1,444 hits including a sponsored link at the bottom of the page for "Herbalife up to 75% off.

Anonymous said...

Try searching for "power bar" on EBay. You should get 11,169. That's impressive, considering HLF has greater sales in North America and beyond.

Anonymous said...

The point about Ebay and Amazon was that anyone saying there isn't product dumping simply isn't looking. Also, there is no reason for someone who just wants product for personal consumption to sign the distributor agreement...they can buy discounted product all over the web. The company line that most distributors sign up just to buy cheaply for themselves is a cover story for the high failure rate.

Anonymous said...

Actually, a correction to this. If you search for "power bar", you get a lot of aluminum bars. However, if you search for Avon and you limit it to skin care and jewelry, you get more than 24k listings.

Anonymous said...

This article is embarrassing. Clearly shows you have no idea how options work

Anonymous said...

John - maybe I'm just really dumb and dont understand options.

But I just dont understand what you are trying to say in this post. Your past posts were always crystal clear.

Now I find myself just scratching my head. Why cant you just clearly state your thesis and supporting evidence without all the fancy word play?

Mak said...

Hi John, thanks for the thoughtful analysis.

Where the analysis runs into a hiccup for me is the assertion that Ackman is now short almost 40 million shares. How do we know that he wasn't the one who covered his short position around the time of expiry and is thus the "mystery" buyer?

I guess one explanation would be that the trading volume would have to have been extraordinarily high given how large his short position is, and would have inevitably had very large upwards pressure on the stock price, neither of which we saw in the days following the expiration date.

Anonymous said...

John, Any idea why CVI or Susquehanna has such a large option position? I don't get it, actually, I don't get any of the option activity.

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