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August 06, 2012 at 09:05 AM
Shorting stocks requires nerves of steel, but when it pays, it pays big. Most investors and advisors had no interest in “shorting a cultural phenomenon” when Facebook debuted its IPO, and the idea of a bear bet against the social media giant seemed insane on its surface.
But after a 45% drop in the time since, certain European investors that bought structured products benefiting from the stock’s decline have generated returns of more than 500%, according to Bloomberg.
The news service notes that 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 a.m. 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% since reporting earnings on July 26 that showed slowing revenue growth and narrower profit margins.
