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Unusual 3-way hedge on Herbalife

Herbalife has been consolidating after a big rally, and one investor wants to hedge.

optionMONSTER's Depth Charge monitoring program detected an unusual three-way trade on the weight-loss company, which is growing fast in China and emerging markets. A block of 1,020 November 52.50 puts was bought for $3.40, and equal numbers of contracts were sold in the October 50 puts and the October 60 calls for $1.20 each.

The transaction resulted in a cost of $1 and will provide downside protection through November expiration. By selling October options, the investor added unusual subtleties to the position:

If HLF rallies above $60 in the next five weeks, he or she will be forced to sell shares at that level. And, if it falls below $50, their profit on the puts will be capped at 150 percent. However, if it stays in its current range through Oct. 21, they'll have protection in place for the following month.

By mixing expirations, the investor is timing the hedge for a potential move in November, which is probably when the next earnings report will come out. Selling the October contracts allows the trader to earn premium before time decay picks up in coming weeks. The trade is an example of the tremendous flexibility that options give investors looking to manage risk.

HLF rose 2.04 percent to $55.97 yesterday and is up 90 percent in the last year. The shares have been ripping amid strong earnings and gapped higher after the last two financial reports. They seem to have resistance in place around $60, which could also explain why the investor sold calls at that level.

Overall options volume was triple the daily average on yesterday.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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