Apple Inc. (NASDAQ:AAPL) stock is taking a huge hit Thursday in the wake of its good earnings report but downward guidance Wednesday evening, but while investors in Apple stock are also bathing in red ink this day, theer is also collateral damage tied to the stock. And no, we’re not talking about the NASDAQ, the S&P or the Dow Jones.
A recent article on the Forbes web site referred to another form of investment that was based on Apple Inc. (NASDAQ:AAPL) stock prices, and these have been hammered. This is referring to what are called “structured notes,” but more technically called “reverse convertibles,” which were bought in huge numbers when Apple was peaking at $705 per share in September. These notes, the piece explains, look like a fixed-income security (like a bond) to an investor, which would rise as Apple’s stock price rises. These investments generally have a cushion that covers investors in case of a drop in price of as much as 20 percent, ensuring principal and/or coupon payments.
However, this just in – with this fall off a cliff, Apple Inc. (NASDAQ:AAPL) stock is down 35 percent since the peak. So much for the cushion. Now, instead of having a fixed-income secure bond investment, many investors now have crashing stock. How prevalent is this? This is not necessarily a small group of investors, according to Bloomberg. How about $1.66 billion worth of these notes?
“More than $241 million of structured notes tied to Apple Inc. face losses after a 27 percent drop in the stock of the world’s most valuable company eroded built-in cushions that protect investors,” Bloomberg wrote in December. “Banks issued 76 U.S. notes linked to Apple stock during the seven weeks starting August 20 when the company was valued at $650 a share or more.”
Are these usually considered pretty safe investments in general?