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Handicapping The Icahn Position In Herbalife
Scott, thank you for digging into and sharing these details of Icahn's accumulations of HLF - fascinating and informative stuff. A few observations:
1) To exercise the 11.5mm calls (1/28 & then 5/10) wd cost *add'l* investment of about $292mm, b/c the ITM portion has already been paid in the premium.
2) Options market makers don't speculatively assume the other side of such huge new positions - they "get the edge, then hedge." Meaning, as soon as Icahn bought his millions of ITM calls the effect was *immediately* laid off in the market by the call sellers buying the underlying HLF stock. When Icahn exercises the calls, the counterparties will then transfer to him their long HLF - those shares which have already been purchased in the marketplace. For this reason, I'm not convinced that exercising his millions of ITM calls will create a sudden price spike or subsequent short squeeze.
3) In your article, you posed the three questions about the role of the OTM puts done at $.01. It was likely a device necessary to get the call-side of the deals done. Adding the put-side turns Icahn's ITM calls into true synthetic longs, which gives the options market makers a way to sell him the calls in such large quantities (i.e. they buy the underlying HLF, as described above). You asked why wd a counterpary do this transaction. The answer is that the call-side contained the slippage in price - the edge needed by the market makers.
Feb 25, 2013. 12:08 PM
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The CFTC Is Needlessly Breaking Good Products
Market manipulation can still occur, even though fund buyers don't take delivery. These funds buy the underlying futures contracts, and will continue to hold long via rolling the position. A speculator with a position-limit long can add even more buying pressure via funds.
Having said that, I agree w/ iknow1, who pointed out that transaction costs and re-balancing issues are a structural flaw of these funds.
On Aug 23 11:11 AM David Fry wrote:
> Great point on "delivery" issue.
Aug 25, 2009. 03:27 PM
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