Is Softbank Really The Nasdaq Whale, or is it Robinhood Traders?

The news reports that SoftBank Group’s options bets on technology stocks could have been a driving force behind the rally, but does this theory hold water?

Welcome back to patrick boyle on finance so a few days ago it was in the news that the whale that’s recently appeared in the equity options space was not just the legendary robin hood traders from reddit wall street bets but also the japanese tech investor softbank news reports that softbank is making billions by using options to bet on technology stocks have

Stirred speculation that the japanese conglomerate is a driving force behind the recent rally in individual tech stocks in today’s video we’re going to discuss how likely it is that the soft bank trades pushed up these stock prices and how their trades differ in market impact from those of retail investors according to the financial times softbank is the nasdaq

Whale in the equity derivative space gobbling up billions of dollars of u.s equity options in a move that possibly stoked the rally in big tech stocks before their sharp pullback on thursday softbank has been snapping up call options in tech stocks during the past month in huge size contributing to the largest trading volumes in contracts linked to individual

Companies in at least 10 years call options are financial contracts that give the option buyer the right but not the obligation to buy a stock a bond or some other financial asset at a specified strike price within a specific time period if the assets price goes up above the strike price by expiration the option owner will go ahead and exercise their option to

Purchase the stock if the price is below the strike price the option will expire worthless and the options buyer will have lost a hundred percent of the money they spend on buying the option if you want to learn more about options i have a bunch of options videos i have a playlist in fact called introduction to options that you can take a look at the financial

Times reported on sunday that the group’s trading strategy meant that it was now sitting on gains of around four billion dollar after the founder masayoshi sun’s aggressive bets on equity derivatives softbank shares lost over seven percent this morning however after this news came out a fall that raised almost nine billion from the company’s market cap so that’s

Kind of interesting they’re up 4 billion but they got sold off and so the the company fell by 9 billion in value and that’s really just down to the idea that maybe a lot of the investors in softbank are just nervous about the size of these positions and the risk associated with them now the nikkei index in which softbank is i think the second largest component

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Dropped only around a half of a percent so it’s not that soft bank is down because the market is down in fact softbank is kind of part of what’s dragging the nikkei down today um before this morning’s fall though softbank stock had climbed around 33 this year and the stock price slide followed two days of declines on the nasdaq which they of course own all of

These options in at the end of last week this aggressive move into the options market marks a new chapter for softbank which in recent years has made huge bets on privately held technology startups through its 100 billion dollar vision fund and i think i even made a little video one of my videos about wirecard related to softbank’s investment in wirecart which

Is actually quite interesting but after the coronavirus market tumult hit those investments hard the company established an asset management unit for public market investments using capital contributed by its founder masayoshi-san now it has also made a splash in trading derivatives linked to some of these new investments the surge in purchases of call options

Has been the talk of wall street in recent weeks some people are claiming that the sheer volume of options trades brought about the recent melt up in many of the big technology stocks over the summer shares in tesla soared 26 in under a week to september first while amazon and alphabet gained around nine percent each the financial times reports that the size of

These softbank options trades has even been making some people within softbank’s organization nervous this options buying comes alongside 10 billion dollar in public investments that softbank is targeting through its new asset management arm according to a filing with the sec last month softbank has bought stakes of nearly two billion dollars in amazon alphabet

Microsoft and tesla investments that are partially funded by cash from its 41 billion dollar asset sale program that was triggered by a collapse in its share price during the covet 19 market turmoil softbank’s huge derivatives bet has worked for now leaving the japanese group with a large but still unrealized profit a continued pullback obviously in these stocks

Could erode these returns so it’s not all over yet so how do these softbank trades differ from the retail options trades that we’ve also been reading about quite a bit recently well occ data shows that small trader accounts spent 40 billion dollars of premium in call options over the last month this is a huge increase in retail option activity it’s way above

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Normal activity is heavily concentrated in very short-term call options with these retail trades with only a week or two remaining till expiration and of course this has mostly been on the kind of hot technology momentum stocks short-term options have a lot of leverage and a lot of gamma when they are close to the money and what this means is that a trader’s

Exposure to the underlying ramps up as the price rises and evaporates as the price falls if the price of the underlying goes up your delta which is your exposure to sort of ownership of those shares increases greatly when gamma is high and equally if the if the stock falls in price uh you know your exposure to it really evaporates the options move to being

Close to worthless quite quickly now the market maker who sells you that call because of course whenever someone buys a call option they’re buying it from someone else and that’s usually a market maker and that person is going to hedge that exposure immediately so they’ll hedge their risk to the underlying stock right away but then as the price rises they’ll

Be required to buy more of the underlying stock in order to remain hedged and that’s because you can’t statically hedge an option you have to dynamically hedge it heavy buying of short-term options therefore accelerates moves in trending stocks it basically causes them to continue trending and equally if they reverse it has the opposite effect what this means

Is that a relatively small amount of options premium can drive a larger market price reinforcement mechanism in the underlying if you want to learn more about how this mechanism works watch my videos on dynamic hedging and i’ll probably link to them in the description softbank’s recent large trades are reported to be a few billion dollars in options premiums

Executed in the form of call spreads and i have some videos on call spreads as well or on option spreads in general if you want to watch those and these ones have three to six month maturity so they’re much longer term than the sort of retail options trades i’m hearing from people in the market that these trades were mostly executed versus stock which means that

Softbank bought the call spreads and sold stocks so they do that as one transaction with the market maker that they deal with executing a delta neutral trade so these transactions themselves you would not expect to have driven meaningful buying pressure on the stocks if you want to learn more about option spreads do watch my video on that topic now these trades

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Are much longer data than the retail trades being done by robin hood traders softbank’s risk exposure is much more heavily weighted to volatility as opposed to gamma with maybe a few hundred million dollars of gamma per one percent across the big tech names this would be much too small to have a material impact on the stock’s prices directly over a short period

Of time so this is very different to the mechanism that you’ll see with those short term high gamma options that the retail customers are buying in the recent tech stock rally along with continued option buying market makers positions would be under pressure from their net vega risk limits which would eventually force them to cover some of that risk in the market

Possibly by buying similarly dated nasdaq or s p call options so they’ll hedge their exposure to these stocks with index options vega is a measurement of an options price sensitivity to changes in the volatility of the underlying asset and risk managers would usually limit the amount of vega risk that an options market maker is allowed to take so if this gets

Too big they’re just forced to hedge their their vega exposure heavy demand for option based protection around the us election which i discussed in last thursday’s video will have fed into this market dynamic and contributed to the much discussed stocks up follow-up behavior of the last few weeks where the vix the volatility index and especially the nasdaq vix

Was trending higher even as stocks continued to rally and this is an unusual circumstance normally stocks rising is associated with fixed declines and vice versa despite some press articles softbank’s options trades alone are unlikely to have accounted for the melt up in tech stocks in the last few weeks hopefully this video helps to explain some of what’s been

Happening in the market recently and if you want to learn more you can check out my other videos on these topics on how options work and you can also take a look at my book on financial derivatives that’s linked to in the description below anyhow talk to you soon bye

Transcribed from video
Is Softbank Really The Nasdaq Whale, or is it Robinhood Traders? By Patrick Boyle

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