Credit Suisse 37.6% autocallable reverse convertibles on Overstock, Square seen as bitcoin bet

By Emma Trincal

New York, Dec. 11 – Credit Suisse AG, London Branch priced $1.05 million of 37.6% annualized autocallable reverse convertible securities due May 30, 2018 linked to the common stock of Overstock.com, Inc. and the class A common stock of Square, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable monthly.

The notes will be called at par plus the coupon if each stock closes at or above its initial level on Feb. 26, 2018, March 28, 2018 or April 26, 2018.

The payout at maturity will be par unless either stock finishes below its 75% knock-in level, in which case investors will receive a number of shares of the worse-performing stock equal to $1,000 divided by the initial share price of that stock or, at the issuer’s option, the cash equivalent.

“It’s an indirect play on bitcoin, and that’s why those two stocks have gone up so much,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

For the year, Overstock is up 215% and Square has gained 180%.

Roller coasters

But those gains are far from smooth.

Between the day after Thanksgiving and Dec. 1, the share price of Overstock plummeted 34% from $63.95 to $42.30.

The implied volatility of the stock exceeds 100%, which is about triple the volatility of a stock like Tesla.

Asked if he would sell the notes to a client, a broker said laughing, “Only if they ask for it. I wouldn’t market it.”

The trade would have to be a reverse inquiry.

“That’s probably what this deal was.”

Bitcoin proxies

Overstock and Square are both seen as crypto currency-related stocks. Their exceptionally high volatility is in part due to their exposure to bitcoin.

Bitcoin is a digital currency that allows quick online payments between users.

Overstock is accepting bitcoins for its international payments. Square is also testing new uses of bitcoins by letting some users purchase bitcoins through its app.

Chisholm stressed the wide price moves of Overstock, stating that gains and losses could be much greater with a direct equity investment.

“Overstock went from $16 in August to $65 in November. That’s less than six months and a return that’s way, way more than 37%. I don’t think you’re getting paid enough for the risk. Just today, it’s up 22%. That’s just not a reasonable thing to do,” he said.

In addition, Chisholm never markets worst-of notes to his clients.

“Investors don’t want to hear the word worst. They don’t want to have exposure to the worst of anything.”

CBOE’s bitcoin futures

One factor behind Overstock’s stunning gain on Monday was the first full day of trading of CBOE XBT Bitcoin Futures, the first ever futures contract on the digital currency, which was launched by the CBOE Futures Exchange on Sunday night. Square did not fare as well. Its stock was flat, up 0.6% on the day.

But the price action of one stock is enough to determine the payout. Just looking at the chart of Overstock, Chisholm said that the stock could easily drop more than 25% and gain much more than 37.6% in six months.

“Given how much this thing can go up and down, why would I lock myself up for six months? It moves so fast, six months is an eternity.

“There isn’t just enough ... not enough upside, not enough downside protection.”

It’s a bubble

Carl Kunhardt, wealth adviser at Quest Capital Management, said he would not risk his clients’ money in a trade that he said is tainted by the “bitcoin frenzy.”

“I have no interest in this,” he said.

“These two stocks, these two companies have tied their future to the bitcoin frenzy.

“The bitcoin returns cannot be sustained. Last time we thought gains could be sustained forever was in real estate in 2007 and before that ... remember in 1999 ... with tech. If by now you can’t tell the difference between a rally and a bubble, you should go to Las Vegas and enjoy yourself.

“I’m in the business of investing, not gambling.”

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22549JMS6) priced on Nov. 28.

The fee is 2.5%.

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