After sinking as Bill Ackman promised CNBC viewers he would deal a "death blow" to the company, Herbalife shares surged during his actual presentation. And that may have cost the head of Pershing Square Capital Management up to $70 million in paper losses on Herbalife options alone.
Ackman's position in Herbalife is often referred to as a short position, but at this point, it is just as much an options position. In October, the fund manager announced that he was converting 40 percent of his $1 billion short position into long-term put options. Puts, which grant their owner the right (but not the obligation) to sell shares for a given price at a given time, rise in value as a stock falls.
As a stock rises, however, the price of put options plummets. While Ackman has never laid out the details of his options positions, many derivatives experts say he likely owns the vast majority of the 50-strike, 60-strike, and 65-strike Herbalife options that expire in January. And on Tuesday, those options lost as much as $70 million on paper, all-told. The greatest percentage loss was in the January 65-strike puts, which lost more than 40 percent of their value in one session. Multiplying that $7 loss by the open interest of 30,000, the combined holders of that option alone lost more than $20 million just on that line of options.
"Are these options all owned by Ackman? Probably not, buy I'm guessing a good percentage of them are," commented options expert Michael Khouw of Dash Financial.