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.