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Is M-O-A-S-S Off the Table for Herbalife (HLF)?

October 3, 2013 11:52 AM EDT
When the news broke this morning that short seller Bill Ackman capitulated on Herbalife (NYSE: HLF), covering 40% of his short bet, conventional thinking would have assumed that the stock would be higher. But Mr. Market is reading it different. Instead, shares are down 5.6% on the news.

Why you ask? Thinking among some hedge fund traders is that with Ackman having covered 10 million of his short shares (leaving him with some 14.5 million remaining), he has effectively taken the "mother of all short squeezes" off the table.

Ackman himself believes that his re-tuning of the position takes away the potential of a short squeeze. "[B]y substantially reducing the size of our short position as a percentage of the share float, we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position," Ackman said. "In that a substantial component of the bull case on Herbalife is predicated on forcing us to cover, we think the restructuring of our investment negates this important pillar of the bull case."

Instead of shorting the extra shares, Ackman now has long dated put options to profit when the "Company is shut down and prosecuted by regulators," as he expects.


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