In exchange, they can gorge on coupons as high as 17 percent in the case of notes sold by Credit Suisse Group AG in April, with protection against a 40 percent swoon in any of the companies. Anything more than that and holders forgo interest payments and could lose as much as their entire principal.
Spokespeople at RBC Capital Markets and Credit Suisse, respectively, declined to comment on the notes.
The chance that either Facebook, Amazon, or Alphabet will fall by 40 percent by January 2020 is 3 percent or less, according to delta-implied probabilities from put options. Netflix is seen as the most vulnerable at about 5 percent, according to data compiled by Bloomberg. That doesn’t take into account the chances that any one of the four stocks could fall by this amount, which is higher than any of the individual probabilities.
David Schawel, for one, isn’t a fan of FANG structured products. The chief investment officer at Family Management Corp. said holders of the notes are effectively "selling very inexpensive volatility."
"It’s not so much that they’ll definitely end up losing money, but they’re selling an underpriced tail option," he said.
Don’t forget: buyers also face correlation risk. Although the products offer downside protection, they’re in effect betting the stocks will continue to move together, said Chatain at ResonanceX.
“It’s an interesting product, but you need to understand where your risk is."
This article was provided by Bloomberg News.