Facebook Inc. (FB)’s 45 percent drop since its initial public offering generated returns of more than 500 percent for European investors that bought structured products benefiting from the stock’s decline.
A put warrant, a security for speculating on the future direction of a company’s share price, which predicted Facebook would be at $22 by March, cost 6 euro cents ($0.07) to buy in the week after Facebook went public with an initial price of $38. Today, with Facebook trading at $21.87 at 09.50 am in New York, the warrant is worth 36 euro cents, according to data compiled by Bloomberg.
Facebook, which raised $16 billion in the biggest technology IPO of all time, hasn’t closed above its IPO price since its first trading day and has fallen 21 percent since reporting earnings on July 26 that showed slowing revenue growth and narrower profit margins.
“If you bought the $22 put when Facebook was trading at $38 then you will have earned a lot of money,” said Heiko Geiger, head of public distribution for Germany and Austria at Vontobel Holding AG in Frankfurt, which issued the $22 warrant.
The value of warrants increases as the reference stock approaches the so-called strike price, the level at which the securities profit or not. Investors can sell the securities on for a profit or wait for the stock to move beyond the strike, or into the money, and receive a cash payment depending on how far the stock falls below that level.