German prosecutors are alleging that the man arrested on suspicion of carrying out the bomb attack on the Borussia Dortmund team bus, in which the Spanish international Marc Bartra and a police officer were injured, may have had a financial motive and bet on shares in the club falling.
If this sounds like a particularly far-fetched plot point for a Hollywood film, that’s because, well, it is.
In the 2006 James Bond film Casino Royale, the “baddie” is an Albanian mathematical genius, chess prodigy and banker to the world’s terrorists called Le Chiffre. Asked by a Ugandan warlord who gives him a suitcase full of cash whether he believes in God, Le Chiffre replies: “No. I believe in a reasonable rate of return.”
The trouble starts when the blood-weeping poker player attempts to earn an unreasonable rate of return by betting against the stock of an airline called Skyfleet and then arranging for its latest prototype to be blown up. Naturally enough, 007 learns of and then foils this dastardly plan, resulting in Le Chiffre losing $100m and suddenly owing a lot of money to some decidedly unsavoury characters (which he attempts to win back in a high stakes poker game).
How is it possible to make money from shares that fall in value? Broadly there are two ways. One is to “short” a stock. This involves you borrowing shares, selling them at the current price, buying them back when the value has fallen and then pocketing the difference after you’ve returned them to the original owner.
The obvious question here is: why would anyone lend you shares so that you can short them? The answer is that investors have different time horizons. So one may have bought the shares in the belief that they will rise over the next couple of years and be happy to earn additional money in fees by lending them out to investors who think there may be a dip in the next couple of weeks or months.
However, there are lots of mechanics and rules around shorting stock, which probably makes this approach less than ideal for would-be Bond villains.
Another, arguably easier, way to bet that shares will fall in value is to buy put options. This is what Le Chiffre does in Casino Royale and what the alleged Borussia Dortmund bomber is thought to have tried.
Okay, now you need to stick with me here as things are about to get a bit mathsy (perhaps it would help to imagine that you’re a secret agent and I’m explaining my plans for world domination while suspending you over a pool full of crocodiles safe in the knowledge that there’s no way you’ll escape).
Put options, Mr Bond, are a type of derivative that give you the right to sell a stock at a certain price at a certain time. Imagine that a company’s share price is £100 and you think it will fall to £80 (or lower) by this time next month. You can buy a £80 put contract on 100 shares for £2 a share. This contract has a breakeven of £78 (the “strike” price of £80 minus the £2 premium you pay to the broker) and will involve you betting £200 of your money (£2 multiplied by 100 shares). You now have the right to sell 100 shares at £80 (regardless, crucially, of what the actual share price is) at the point that the contract expires.
If the shares rise in value over that time, you lose your stake – £200 down the drain. If they stay the same, you lose your stake. If they fall but only to £85, then, again, you lose your stake. But, if the shares fall below the strike price of £78, then you are “in the money”. If the shares fall to £50, for example, you make £2,800 (the £80 strike minus the £50 the shares are worth when the contract expires, minus the £2 premium, multiplied by 100 shares). If the company goes bankrupt, meaning the shares are worth zilch, you’ve hit the jackpot.
But timing is crucial. The share price must fall before the put option expires. And before Bond can foil your nefarious plot.
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