Last week, before a senator released letters that sent the shares of Herbalife into a tailspin, certain investors were positioning themselves to make money if the stock fell.
Trading volume in put options â€" financial contracts that gain in value as a particular stock price declines â€" spiked late last week to a level not reached since February 2013, according to Bloomberg data. Even for a volatile stock like Herbalife, it was enough to make some market experts take notice.
The company has been at the center of a brawl among prominent investors since late 2012, when the hedge fund manager William A. Ackman announced a $1 billion bet against it. While Mr. Ackman contended that the company was a pyramid scheme, other investors took a bullish view, helping to push the stock price higher.
Herbalife, a multilevel marketing company based in Los Angeles that sells vitamins and drink mix through a network of individual distributors, has denied Mr. Ackman’s claims.
But Mr. Ackman got a break on Thursday. That was when Senator Edward J. Markey of Massachusetts sent letters to federal regulators urging them to investigate the company. Herbalife’s stock fell more than 10 percent that day, before dropping another 9 percent on Friday.
Asked if anyone in Mr. Markey’s office bought put options or leaked news of the letters, a spokeswoman for Mr. Markey, Giselle Barry, said in an email: “No, they did not buy; no, they did not leak.â€
The spike in options trading activity may have had its roots in events on the other side of the world involving Nu Skin, another multilevel marketing company that is based in Utah.
An article last week in People’s Daily, the Communist Party newspaper in China, that alleged the company operated a pyramid scheme set off a steep decline in the Nu Skin’s stock. After tumbling on Wednesday, the stock continued falling on Thursday when the Chinese government said it would look into the allegations.
Herbalife’s stock tumbled as well, only finding its footing at the start of this week. It is possible that investors rushed to buy put options to protect themselves against further declines.
On Jan. 16 â€" Thursday of last week â€" a total of 49,906 put options on Herbalife traded, the most since Feb. 15, 2013, when 148,393 put options traded, the data show. (That was the day Carl C. Icahn, a major rival of Mr. Ackman’s, officially announced that he had bought a big stake in the company.)
Then, last Friday, 69,668 put options traded.
There was also an unusually high amount of options trading activity a week earlier, on Jan. 10. At that point, news articles were saying that Herbalife shares had reached a 52-week high, possibly inspiring traders to get out of their bearish positions.
The increase in options trading volume was noticed earlier by Jon Najarian, a trader and CNBC television personality. He said on the air on Friday that the timing of the trades looked suspicious.
“There are really no coincidences on Wall Street,†Mr. Najarian said later in an interview.
