How to Play Herbalife After Ackman Concedes Defeat

Jeff Macke

Bill Ackman has conceded defeat in his battle over Herbalife (HLF). Nine months after brazenly vowing to "never cover a share" of his $1 billion Herbalife short position, Ackman has done just that. In a letter to shareholders first reported by the, Ackman told investors he has covered 40% of his Herbalife short, replacing the position with out-of -the-money put options.

The moves changes the game for those riding along with Icahn on other Herbalife bulls. Ever since Carl Icahn declared war on Ackman via a very special CNBC Halftime Report, common stock investors in Herbalife have gotten a free ride. With Ackman short 20% of the Herbalife float, Icahn and other hedge fund heavies loaded up on common stock. What Icahn described as "the mother of all short squeezes" pushed HLF shares more than 120% higher just in 2013 alone.

Related: Herbalife: Monster Short Squeeze Coming Soon, Says Chartist

Ackman was short about 20 million shares of Herbalife and says he covered 40% of the position. Assuming he means he bought options to cover 8 million shares, that would make it much more difficult for "market manipulators to force (Pershing Sq) to cover our positions," as Ackman says in his letter.

Now Ackman has replaced much of his naked short on Herbalife with put options. Ackman can still win if Herbalife shares collapse, but artificial pressure on the stock has been eased. Jon Najarian of optionMONSTER says Ackman could still get buried but the game has changed for Main Street investors. "To the extent that people like George Soros and Dan Loeb and a whole host of others were preying on (Ackman) I think that may be over as far as the mother of all short squeezes, but it doesn't mean he still can't lose a significant amount of money."

By all appearances making Ackman lose face and a ton of money was largely Icahn's goal. Playing along with that game has been rewarding for individual investors but the game is over now. If you're going to dance among the hedge fund elephants the key to not getting trampled is staying nimble. Now that Ackman has conceded defeat the squeeze is done. It's time for investors to learn from Ackman's mistake and retreat from Herbalife "squeeze play" trades.

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