This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Put Away the Prozac, Herbalife Isn't Finished

Add it up, and Herbalife has a 27% or more short interest. The number of shares shorted bounces around quite a bit. Last year, around this time, more than 32 million shares were shorted, and as recently as January, about 20 million were.

Now imagine a well-financed connected short-seller with a 600,000 share short position that shorted after news broke about the Federal Trade Commission's investigation at an average of $59.

The short-seller watched the shares fall below $50, only to bounce back to above $61 in the following weeks. Now the position is underwater $1.2 million, and an attempt to exit 600,000 shares will take over a day unless the short wants to pay up and increase the loss to $2 million or more.

You or I may really sweat this situation, but not this short-seller; s/he has a get out-of-jail-free card. The short knows 20/20 is investigating Herbalife and a well-timed leak will open the doors to profit. That's exactly what we witnessed Friday.

It's not a coincidence it happened on a Friday afternoon. It's not a coincidence the worst news followed the first wave. The only real surprise is these same old tactics used by our grandparents continue to work time after time.

I'm certain the ancient Chinese General Sun Tzu would approve of the strategy and execution. He would have made a fantastic hedge fund manager. If he were here today and we could ask, I'm certain he would advise investors to use the market action to your advantage.

Options provide the vehicle to exploit market volatility. If you're long, consider selling covered calls against some of your shares. If you're considering an entry, consider selling puts instead of the shares directly.

Option buyers are eager enough to buy contracts that you can sell a put and still make money if the share price falls. For example, I posted a long Herbalife trade idea in Real Money Pro that suggested selling the August $40 puts for $5.90 before the market opened on March 21.

Even including the worst of Friday's selling, the contracts were never in the red. That's the power of adding options to your investment strategy and goals. Covered calls allow investors to tolerate larger price swings because the option acts as a hedge against price swings.

When non-economic events occur, and Friday's selloff was a non-economic event for the company, options allow for buying into uncertainty. If a Wall Street short-selling insider is buying (to cover), you can bet it's probably an ideal time for you to also.

Expect shares to remain volatile, but don't let the volatility scare you; embrace and profit from the price action while others panic.

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.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
HLF $45.09 -3.10%
AAPL $94.01 -2.70%
FB $104.02 -5.90%
GOOG $684.00 -3.40%
TSLA $163.01 -7.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs