German police say Sergej W targeted bombs at football team Borussia Dortmund to profit from a sharp fall in the club’s shares through put options.
When news broke of a bomb blast targeted at Borussia Dortmund it was easy to assume this to be yet another lamentable attack by Islamic extremists. Prosecutors, however, soon came to a different, and far more unusual conclusion.
Rather than ideology, the motive for the attack was money. Investigators believe a lone perpetrator detonated explosive devices so that he could make big profits from a sharp fall in Dortmund´s shares.
Put options were the vehicle for the get-rich-quick scheme, which would theoretically enable the suspect to profit from his inside knowledge of the attack.
Prosecutors say the prime suspect, currently identified only as Sergej W, bought thousands of put options prior to the attack on 11 April, 2017.
They believe the 28-year old Russian-German man could have made hundreds of thousands of euros in profits had the blast resulted in the deaths of Dortmund players. In such a scenario, there would have been a corresponding sharp fall in the club´s share price.
The three bombs Sergej is alleged to have planted exploded in a hedge as the team´s bus was on the way to a Champions League quarterfinal. Fortunately, however, the Dortmund team narrowly escaped disaster.
While a policeman and one player were injured in the explosion, the scale of carnage required to sink the shares did not materialise. In fact, Dortmund´s share price actually rose in the day after the attack, ending the session up by nearly 2%. Sergej´s get-quick-rich scheme had failed.
Following a tip-off from a German bank which noticed his unusual trades, police were also able to arrest Sergej and charge him with attempted murder.
Buying put options is a common way that investors can profit from potential falls in shares. While there is a cap on the realisable profits from buying a put option as a share price cannot fall below zero, the potential loss is always limited to the non-refundable contract premium paid at initiation.
This latter factor makes such instruments an obvious choice for those with modest capital. Sergej, however, is alleged to have opened a far larger put-options position than an ordinary investor would normally consider; he was acting on the inside knowledge of his planned attack.
The former electronics company apprentice is thought to have taken out a five-figure loan to purchase the options.
Volatility and events
Higher share price volatility increases the likelihood of making a profit from puts. When volatility is low and an underlying share price remains virtually unchanged, we´ve still lost the option premium that we paid at the initiation of the contract.
However, buying contracts on stocks with lower volatility but which we believe hold strong potential for share price movement due to events can often prove to be better value. This is because the cost of contracts on stocks with higher volatility tends to be greater, reducing the potential for profit.
Football shares can be sensitive to teams´ performances in major tournaments, with the outcome of such events representing potentially strong catalysts for share price movement.
For instance, Manchester United shares fell 20% during 2016 after it failed to qualify for the 2016/17 UEFA Champions League. This was despite it reporting strong financial results.
While insurance can be taken out to protect the value of star players, it can be particularly difficult to find replacements for such players at the top level of the sport, especially once their role within the team is properly considered.
Losing a key player in the midst of an important tournament such as The Champions League can make all the difference. This must surely have been in Sergej´s mind if the allegations that he detonated bombs as the Dortmund team´s bus was on the way to such an important fixture are proved to be correct.
At the same time, other factors can have an important impact on football clubs´ share prices. For instance, new sponsorship agreements helped Turkish-listed football shares Beşiktaş JK, Galatasaray SK and Trabzonspor generate strong double-digit returns during 2016.
Of the 22 European football teams that are listed on stock exchanges, Dortmund was also one of the best performers of 2016 as its shares benefited from a new broadcasting agreement to begin in the 2017/18 season.
Perhaps the earlier strong performance of the Dortmund shares also made them look like a rich target for Sergej, who had allegedly positioned himself to profit from their demise.
Nevertheless, despite the gains during 2016, Dortmund´s shares remain well below the level they were floated at some 17 years ago.
Analysts continually bemoan the lack of liquidity in the shares of many football clubs such as Dortmund. When it comes to trading in shares with relatively low liquidity, it can be more difficult to enter and exit positions compared with the stocks of companies that are more widely traded.
For many investors, the uncertainty and risk that comes with investing in football stocks just doesn´t stack up. As with every sport, there is a certain amount of luck as well as skill involved in winning. Over the long term, it´s difficult to maintain consistency in key tournaments.
As the Dortmund attack highlights, there is also a high degree of key person risk involved. Football clubs are all too dependent on just a few star players.