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Herbalife Is Resembling a Trip to the Casino

Stocks in this article: HLF TSLA NUS USNA

Citron Research, a Web site well known for exposing Chinese frauds claims Usana Health Sciences and Nu Skin Enterprises' investors should carefully question the companies' business practices in China. 

If Citron Research is correct and China drops a hammer on one or both of these companies like New Jersey did with Tesla, a spillover onto Herbalife is inevitable. Any issues for these and the endless other network marketing companies may shift the perception of the network marketing business model.

In politics, perception is everything, and even a small snowball can become a serious avalanche in the right situation. You can bet Ackman is searching to find the right snowball and is more than willing to help it get started rolling.

We don't know if Ackman or Icahn will win, but it's necessary for investors to understand that unlike most companies, Herbalife could be more about political gamesmanship than market strategy. If you're not prepared for that possibility, you may not want to have long or short exposure.

Those brave or with enough conviction may want to consider options as a risk mitigation tool.

For example, with shares trading near $58, a May $50 put option can be bought for about $3.90. A put option gives the right but not the obligation to sell shares for $50. During a worst-case scenario, if the wheels totally come off Herbalife, you can exercise your put option and sell at the strike price of $50. This effectively caps your loss at $12 ($58-$50=$8+$4 option price totals $12).

Other strategies include selling calls to offset the cost of a put option or simply selling a call to lower your risk while not paying the high cost of option premium.

I don't think what's happening with Herbalife is fair, and I hope when the dust clears it comes out on the other side. That said, I would be amiss if I didn't emphasize the perils the company and investors face.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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