For all you fools waiting for Ackman being forced to cover his short position, you should read his letter to investors dated October 2nd. Here are the main points:
Ackman converts 40% of Herbalife short to long-term puts, questions buyback :
Bill Ackman has shifted his strategy. Pershing Square has converted around 40% of its Herbalife (HLF) short into long-term put options which will allow the hedge fund to "make a similar amount of profit as if [it] had maintained the entire initial short position" assuming HLF fails "within a reasonable amount of time."
This reduces the percentage of the float sold short and, to quote Ackman, if "a substantial component of the bull case ... is predicated on forcing [Pershing Square] to cover [then] the restructuring of [the] investment negates [an] important pillar of the bull case."
Perhaps more important is Ackman's take on HLF's chances of launching an investment grade bond issue to fund a $2B buyback: "When Moody's withdrew its ratings on HLF, the company was rated Ba1, a junk rating [and] had only $178M of debt, approximately 0.5x 12-month trailing operating profits. If HLF were to issue $2B of additional debt today [it] would have $3B of total debt, or 4.3 times 12-month trailing operating profits."
The point: In the event of a $2B bond issue, the company would have 16 times as much debt as it did when Moody's rated it in junk territory. Given this, Ackman wonders how HLF could possibly garner an investment grade rating, let alone an interest rate of 4% (the Tim Ramey thesis).
Ackman, you are a genius! You have outplayed Icahn, Soros, and Stiritz. Those 3 have no reason to continue to be in this stock any longer because they can't execute the SQUEEZE they were attempting to make free money. For them to stay longer is for them to sit on dead money until the day the government may rule against HLF. Congratulations, Bill!
Why should I worry, us shorts don't need to cover anymore - there's no squeeze, except maybe this one: the squeeze when all the longs rushing to get out the door at the same time can't fit through it ( without causing the stock price to drop $20 )
The prices for the call options are high because of something called put/call parity.
Suppose the price of the stock is $70.
Put-call parity tells you that, absent a dividend payment, the put and the call should sell at roughly the same price.
If the call were $2 and the put were $1, then people could buy the stock and the put and simultaneously sell the call and lock in a $1 profit.
So, because Ackman has needed to buy huge numbers of puts, he has caused their price to increase. Paradoxically as a result he has called the price of the calls also to rise.
It is all very simple when you logic it out.
Ackman's big problem is that options are wasting assets. He is now paying a huge amount of time value premium on options that are likely to go to zero, letting his fund holders experience again the kind of lsoses they had in his little adventure with Target.
HLF has run up because of the potential short squeeze, not for any other reason. As of today (Oct.2nd), Ackman has changed the game and there's no longer a possibility of a short squeeze! Those juicy premiums on the calls should be the last ones you see once everyone gets the news. jmho-buckaroo