If you're short Herbalife (HLF), you better take a close look at Nu Skinand what happens when a stock priced for destruction receives a stay of execution.
Nu Skin, the network marketing health care product maker, said China's Administration of Industry and Commerce will only hit Nu Skin with $540,000 in fines for unregistered direct sales and product claims lacking sufficient evidence to support stated benefits.
The market heard this and saw a significant victory because China could've barred the company from ever selling its products there again.
Nu Skin shares soared over 30% in pre-market trading and now are up 19% to $89. Nu Skin Enterprises voluntarily suspended business promotional meetings and new applications for sales representatives earlier this year and hasn't resumed recruiting pending direction from Chinese regulators.
Nu Skin Enterprises' short-seller blood bath on Monday is nothing compared to what Herbalife investors will face if it receives a comparable Chinese resolution. Only 4.7% of Nu Skin Enterprises shares are shorted compared to neck-tightening 24% short interest for Herbalife.
For Herbalife investors, an announced slap on the wrist could send shares 50% higher before the opening bell. I warned investors that shorting Herbalife is full of peril offering little chance to profit. Maybe if you're skilled at active day trading a profit can be squeezed out of trading options, but if you buy and hold put options, you have a negative expectation in my view.
I also posted a Real Money Pro trade idea that included selling the August $40 put before the market opened on Friday. It's fantastic that it turned out to be the high of the day, but more importantly is it places you in a position to receive the best of it when others panic.
I'm not a fan of network marketing and have zero desire to join one, but that doesn't mean anything to me in relation to the investment thesis. Not everyone shares my agnostic opinion between a stock and the underlying company. Not understanding that the price is what you pay, and the value is what you receive costs investors a lot of money.
Don't make the same mistake and short a stock because you don't like the company or buy because you do. Allocate your investment capital based on if you have a measurable edge compared to your counterparty.
Remember, every time you make a trade, there is someone with the exact opposite opinion as you. That's what makes a market and someone is the smart money, and the other is the dumb money. If you can't clearly articulate the advantage you have over the other party then maybe you're not the smart money in that particular situation.
Herbalife shorts face a real possibility that they will wake up one morning and find their accounts are bleeding red. Shorts buying put options to limit risk probably will lose money because the implied volatility (time premium) is so rich that even if shares fall, option decay requires that the price fall fast and hard to profit.
Stocks with over 20% short interest and already beaten lower rarely continue lower at a rapid pace when they pay an oversized dividend, profitable, and feature a low price-to-earnings multiple. In other words, the time to short was when Herbalife traded above $70. Is it possible to make money shorting now? Sure, but don't try to predict the future, try to make solid decisions based on available information.
If you want to gain exposure, think about selling call options. The option premium is rich, and a covered call will have less of a "roller coaster" impact on your portfolio.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.