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