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Massive trade suggests Ackman is doubling down on Herbalife

Is Bill Ackman adding to his short bet against Herbalife?

That is what option experts are deducing after a massive bearish bet against the stock was executed over two days this month. 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.

(Read more: Nu Skin stock tanks after Chinese investigation)

"This was just a huge, huge bet to make, and the number of people who could do that is really small," said option trader Mike Khouw, primary strategist at Dash Financial. "And Ackman has just enough hubris to do it."

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.

Buying a put option is profitable only if the stock price falls below the strike price of the put minus the money spent. In total, this trade costs over $32 million and represents a bet that Herbalife stock will fall below 42.75 by January 2015—a 50 percent decline from where the stock was trading.

The two-day trade was itself large enough to make the January 2015 50-strike put Herbalife's most-held option.

Traders say the trade's sheer size and nature limits the number of investors who might have made such a play.

"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.

Khouw said, "When you start putting the pieces together—$33 million outlay, net of commissions of premium—who could? And who would? But this fits Ackman's M.O. perfectly."

(Read more: Ackman: Herbalife's bad practices continue)

Herbalife headquarters in Torrance, Calif.
Patrick Fallon | Bloomberg | Getty Images
Herbalife headquarters in Torrance, Calif.

In an Oct. 2 letter, Ackman announced that he had converted more than 40 percent of his short position on Herbalife into "long-term derivatives, principally over-the-counter put options."

It is conceivable, then, that Ackman might have bought more over-the-counter options to perpetuate or increase his bearish bet. And to hedge, the party that sold him those put options would then be likely to buy listed options.

Calls made by CNBC to both Ackman and Pershing Square were not returned by press time.

The trade has quickly become a winner on paper, with Thursday's plunge in Herbalife shares bringing the value of the puts to nearly $10. The shares came under pressure in sympathy with Nu Skin, a similar company that Chinese newspaper called a "suspected illegal pyramid scheme" (precisely the charge Ackman levels at Herbalife) leading the Chinese government to announce an investigation.

Still, when asked via email what could bring the stock all the way down to $40, Herbalife analyst Tim Ramey offered a terse response: "No idea."

Ramey, who has called Herbalife his top pick for 2014, followed up by saying that in his estimation, shares wouldn't fall that far even if the company's China business disappeared entirely.

CORRECTION: This version corrected the expiration year of the 50-strike puts in Herbalife to 2015.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions.

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