The challenge is to understand what is happening here and evaluate whether the strategy fits your goals and objectives as a trader. There is a myriad of information available on why Mr. Ackman wants to sell HLF stock and why Mr. Icahn believes in it. As we take a look at it for our purposes, the most important part of this trade and the SEC filing by Mr. Icahn is how options were used to get into this incredibly large long position.
In reading the SEC filing, it is obvious that the iconic Icahn has used the over-the-counter (OTC) market quite a bit to accumulate his positions and owns much stock and long call options (to get long stock) at below the $33 level. He has also sold many puts OTC to accumulate the obligation to purchase stock. As it is very easy to understand what the stock position is, be it straight-long or straight-short, the options part of Mr. Icahn’s position is what makes this a bit more difficult to understand.
As I stated earlier, he did use the OTC market for this transaction, but this does not mean we can’t easily understand the position. The first thing is to keep in mind the date of May 10, 2013. This is because one of the advantages of the OTC market is that you can negotiate expirations for whenever you’d like. In other words, on May10, you could see a large change of control in the underlying stock, as that is a day in which many of these options can be exercised. However, keep in mind that they are deep in the money as most are on the $23.50 strike. On the other end of the equation, Mr. Icahn sold puts against these. The reason this is so important is that it is the same position, as you can have the stock put to you. It lets you finance the price of the calls by using the premium collected from the sale of the puts.
The next important time frame from an options point of view is January 28, 2015. Mr. Icahn has similar positions with these dates. On this date, the calls that were purchased have a strike price of $26, so a large amount of stock could come under his control. Again, there were puts sold against them in order to finance the purchase. One footnote on both of these dates and with all of these trades: The filing refers to all puts as European, so they can only be assigned or exercised on Expiration Day, and all calls as American. One quick note on the American exercise is that those options can be exercised at any time. However, mathematically and financially they become more attractive as you get closer to expiration.
Our takeaway in understanding this filing is that Mr. Icahn has used options to give himself a high probability of owning a lot of stock. With this filing that would result in over $14 million from stock and calls. It is expensive to purchase these deep in-the-money calls. The part that is brilliant is finding another way to achieve the same position (sale of puts) and reduce the actual cash outlay. One of the things I write about regularly and I know so many of you employ, is reducing cost while giving yourself a nice probability of making money. What is so encouraging is when you see the folks at the highest level of finance doing the same thing and using the same products you do.
For more from J.J. Kinahan, follow him on Twitter, @TDAJJKinahan.
Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Options.
Commentary and examples provided for educational purposes only. Should not be considered a recommendation for any specific security or strategy. Supporting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.
