SoftBank partially responsible for tech stock rally in recent weeks?

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SoftBank partially responsible for tech stock rally in recent weeks?

Post by willthrill81 »

A Japanese conglomerate named SoftBank has reportedly, by the Financial Times, been buying billions of dollars of equity options in tech heavy stocks of late. Some believe that this was a significant factor underlying the market's sharp uptick prior to the last couple of days' trading. They seem to believe that SoftBank will continue their buying spree.

In my mind, a single entity buying billions of options shouldn't have that big of an impact on the market, but I know that options can lead to weird distortions.

Any thoughts on this?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 7eight9 »

Zerohedge had an article about it yesterday --- SoftBank Identified As Mystery Marketwide Call Buyer
https://www.zerohedge.com/markets/specu ... call-buyer
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Softbank induced the Nasdaq Sell off or so it seems

Post by elderwise »

[Thread merged into here, see below. --admin LadyGeek]

https://www.ft.com/content/75587aa6-1f1 ... f866753fa2

Is Masa the new reddit WSB'er lol:

Also how is this not considered a violation of SEC / Market manipulation rules? Seems like a classic pump and dump on a billion dollar scale.

They bought calls, created a feedback loop (forcing MM to buy more stocks) then bought puts too on indexes so making bank both on the rise and fall..

They also probably sold stocks, they have a good amount of stake in all big tech's amzn, tsla , goog etc..

Anyone else read this?
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Re: Softbank induced the Nasdaq Sell off or so it seems

Post by JoMoney »

Archived link to article:
https://archive.is/jnChJ

...interesting...
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by LadyGeek »

I merged elderwise's thread into the on-going discussion.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by elderwise »

willthrill81 wrote: Fri Sep 04, 2020 2:49 pm A Japanese conglomerate named SoftBank has reportedly, by the Financial Times, been buying billions of dollars of equity options in tech heavy stocks of late. Some believe that this was a significant factor underlying the market's sharp uptick prior to the last couple of days' trading. They seem to believe that SoftBank will continue their buying spree.

In my mind, a single entity buying billions of options shouldn't have that big of an impact on the market, but I know that options can lead to weird distortions.

Any thoughts on this?
I do not understand how options work, but a comment of WSB makes sense:

The fact that Softbank created a positive feedback loop by buying so many calls so as to force banks to buy shares to cover Softbank’s calls, inflating prices even higher, then Softbank WROTE calls for much higher strike prices which they knew asset prices would not hit is straight up market manipulation.

Honestly sounds like they’re trying to *** over US investors to make up for their smoothbrain bailouts of WeWork. I hope the SEC **** them

Edit: If you don’t understand options, buying $4 Billion in call options forces banks to buy shares worth Hundreds of Billions to cover their end

Any one doing option trading here not notice this in the trading books or whatever you use to view option activity?

To me this sounds straight up securities fraud ?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

Is there any hard evidence it was SoftBank or is this just gossip?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by willthrill81 »

000 wrote: Fri Sep 04, 2020 5:09 pm Is there any hard evidence it was SoftBank or is this just gossip?
I don't know that there's hard evidence, but it seems to be a lot more than gossip.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by langlands »

When you buy very OTM calls, you are taking a large leveraged position. So depending on how OTM the calls bought were, the effect of $1 billion of calls could be as much as the effect of $10 billion of shares bought.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

elderwise wrote: Fri Sep 04, 2020 4:55 pm Edit: If you don’t understand options, buying $4 Billion in call options forces banks to buy shares worth Hundreds of Billions to cover their end
No. The banks chose to write the options and then buy the underlying. The banks weren't forced to write options.
elderwise wrote: Fri Sep 04, 2020 4:55 pm To me this sounds straight up securities fraud ?
How?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by rascott »

This is something that actually makes sense for the bubble up..... rather than RH/retail.

Massive call option buying certainly will drive up prices. Option market makers aren't in the business to take the other side of a trade.... they are in it to skim premium and arbitrage. If they are short a load of calls, they need to buy up stock to balance their book..... driving the underlying equity price.


Again.... this is why investors should literally ignore stock market prices entirely. It's an incredibly laughable game in the short- medium term.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by rascott »

000 wrote: Fri Sep 04, 2020 5:23 pm
elderwise wrote: Fri Sep 04, 2020 4:55 pm Edit: If you don’t understand options, buying $4 Billion in call options forces banks to buy shares worth Hundreds of Billions to cover their end
No. The banks chose to write the options and then buy the underlying. The banks weren't forced to write options.
elderwise wrote: Fri Sep 04, 2020 4:55 pm To me this sounds straight up securities fraud ?
How?


Yeah, that posts makes no sense and is from someone who doesn't understand options. Nobody is forced to do anything..... and also don't see how it's even close to fraudulent. Just because you are a big bruiser doesn't make it illegal to operate the same as a little guy.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by langlands »

Options market makers do something called delta hedging to maintain a neutral stance with respect to the markets (no exposure to markets going up or down). When they write call options, they go into the underlying securities market and buy. When they write put options, they go into the underlying securities market and sell. This is the mechanism by which bullish or bearish sentiments in the options market are transmitted to the underlying securities market. Buying equity call options has the effect of exerting positive pressure on the stock market and vice versa for put options.

If Softbank is attempting to manipulate the market, they are surely doing it in a very stupid and risky way.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by tesuzuki2002 »

langlands wrote: Fri Sep 04, 2020 5:35 pm Options market makers do something called delta hedging to maintain a neutral stance with respect to the markets (no exposure to markets going up or down). When they write call options, they go into the underlying securities market and buy. When they write put options, they go into the underlying securities market and sell. This is the mechanism by which bullish or bearish sentiments in the options market are transmitted to the underlying securities market. Buying equity call options has the effect of exerting positive pressure on the stock market and vice versa for put options.

If Softbank is attempting to manipulate the market, they are surely doing it in a very stupid and risky way.
2020 is a very risky year in general... so this makes since... it will likely be a run up to the election... the bottom falls out after the election...
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by whodidntante »

I thought the tech rally was due to strong future cash flows that invalidate any valuation concerns that wimps have. :twisted:
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by elderwise »

langlands wrote: Fri Sep 04, 2020 5:35 pm Options market makers do something called delta hedging to maintain a neutral stance with respect to the markets (no exposure to markets going up or down). When they write call options, they go into the underlying securities market and buy. When they write put options, they go into the underlying securities market and sell. This is the mechanism by which bullish or bearish sentiments in the options market are transmitted to the underlying securities market. Buying equity call options has the effect of exerting positive pressure on the stock market and vice versa for put options.

If Softbank is attempting to manipulate the market, they are surely doing it in a very stupid and risky way.
langlands, thanks so that explains a bit.

But can you tell me is the tanking because they sold their calls ? like what caused it to end ? like if they were doing this and buying higher priced calls the market should have just kept risen till .... when? like do they run out of calls / puts then the NQ00 / Nasdaq100 tanks?

Also I read that if you buy calls very close to expiration the IV or premium is very high?So did they plan this months ago...

If they still hold calls for next week, are they gonna lose a lot on the options premium they paid (call / put contracts)?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Semantics »

rascott wrote: Fri Sep 04, 2020 5:27 pm
000 wrote: Fri Sep 04, 2020 5:23 pm
elderwise wrote: Fri Sep 04, 2020 4:55 pm Edit: If you don’t understand options, buying $4 Billion in call options forces banks to buy shares worth Hundreds of Billions to cover their end
No. The banks chose to write the options and then buy the underlying. The banks weren't forced to write options.
elderwise wrote: Fri Sep 04, 2020 4:55 pm To me this sounds straight up securities fraud ?
How?


Yeah, that posts makes no sense and is from someone who doesn't understand options. Nobody is forced to do anything..... and also don't see how it's even close to fraudulent. Just because you are a big bruiser doesn't make it illegal to operate the same as a little guy.
From the SEC's website:
Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions.
ISTM that if what's been reported is true, an argument could be made that they weren't purchasing the options in good faith. I.e. they weren't purchasing the options because they thought these companies were worth more than the strike prices, but simply because they knew it would drive up prices. Trading securities in such a way as to manipulate prices is illegal - it doesn't get any more blatant than this, no?

If you did this type of manipulation as an individual trader on a small stock, you'd be thrown in jail. I'm not sure how this is logically that different than what Sarao did in the 2010 flash crash, it's just more subtle in this case.
Nobody is forced to do anything.....
I don't understand this argument. Are you in favor of allowing insider trading then?
Last edited by Semantics on Fri Sep 04, 2020 10:22 pm, edited 1 time in total.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by elderwise »

Also not sure if these are connected or not but a lot of Tesla Directors / board members cashed their options (not Option trading) but RSUs or ESOP whatever it was like 5 mill, 9 mill, i wonder if somehow its connected to this artificial pump and dump.

I agree with the poster above, if you do options trading with the sole intent of manipulating their underlying securities (and really its driving up / then tanking ) and buying calls and puts, how is it not an issue?

this is very similar to the Flash crash of 2010 - that time the UK guy who did something on the CBOE - actually triggered algos on another HFT / to automatically start the sell of e-mini contracts and had a domino affect on the market.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by unclescrooge »

Seems like Masayoshi is fueling his gambling addiction via SoftBank.

If I was an investor in that fund, I would be pulling it right now. Actually, I would have pulled after the whole WrWork debacle.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by pseudoiterative »

The chart titled "single stock call option volume has been rising rapidly" in the FT article (mirrored by the archive.is link above) really communicates the change in character -- the volume of single stock call options is roughly double anything observed the last trailing 3 years! Wow!

There's some good comments in the HN thread about this -- I found the following explanations of the dynamics helpful:
In summary:
1. Softbank has been paying up to buy a mountain of call options on big cap tech stocks.
2. Lots of inexperienced traders have been piling on, buying those same call options, e.g., on Robinhood.
3. The brokers/hedge funds selling those call options have been hedging by... buying big cap tech stocks.
4. Passive funds have been mindlessly following along, "copying the market," getting more and more concentrated on big cap tech.
-- https://news.ycombinator.com/item?id=24377715
1) Shorted dated options have lots of gamma which amplifies the effects of this exponentially.
2) There are very few discretionary investors left, most are index funds. They [softbank] targeted a few [stocks] names which have outsized influence on indices. This in turn forces passives to buy those same names [stocks] in order to keep tracking error low. Which then amplifies the effects from point 1, giving SB pnl which they can lever to repeat the cycle.
Source: hf head of quant trading
(emphasis not in original)
-- https://news.ycombinator.com/item?id=24379040

If the market index were temporarily over-priced by these kind of shenanigans, how might that interact with passive investing approaches?
  1. If you buy into a fund that passively tracks total market cap, and then hold your fund until the index falls back to valuations supported by fundamentals, you permanently lose capital
  2. If you sell a fund that passively tracks total market cap before the music stocks, you gain capital (+/- taxes losses, if you can bring yourself to jump back into the market & other pleasures and sorrows of market timing)
  3. if you were holding a passive fund before the shenanigans started, and keep holding until the shenanigans end, you're roughly even. Even better if you don't look at the stock prices or your portfolio or pay attention to financial news!
It's interesting to try to estimate how much impact these shenanigans might have on the entire S&P500 index. The list of softbank's positions as displayed in the zerohedge post is:
amazon, google, nvidia, tesla, zoom, square, paypal, shopify, servicenow, spotify, paycom, etsy, pinduodo inc - DR, hercadolibre, sea ltd - DR, splunk inc
If we read through a list of S&P500 members and their percentage market weights, it looks they account for roughly 30% of the S&P500. Then if we compare the market prices of these stocks now versus what they were back in mid feb 2020 -- the pre-covid-news-high -- there's an average increase in stock price of around 25% -- the 25% average increase in price just for these stocks (mainly AAPL, AMZN, MSFT, GOOG[L], FB etc) translates into around a 7% increase in the entire S&P500 index.

So for argument's sake if half of that 25% price rise were attributable to genuine sustainable fundamental improvements in the long term profitability of these trendy companies* (the rest of the economy getting forced to adopt more online tech & digital habits, much of which will stick after lockdown) but the other half of the 25% price rise were due to market dynamics caused by softbank and retail investors buying a huge volume of single-stock call options, then that'd be equivalent to a +3.5% over-pricing of the entire S&P500 index.

3.5% isn't much but it is about what I expect to make annually in real profits if I were to hold a pure stock portfolio these days, so now might not be the best time to convert a 100% cash portfolio to a 100% S&P500 portfolio.


This is a lot of fun and it is a shame that Matt Levine isn't writing his usual column at the moment, since Matt's coverage of softbank is usually entertaining ( https://www.bloomberg.com/opinion/artic ... to-a-ditch ).


* let's pretend TSLA isn't on the list and only focus on the remaining trendy companies with modest PE ratios < 1000
Last edited by pseudoiterative on Sat Sep 05, 2020 3:22 am, edited 3 times in total.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by pseudoiterative »

another thank you to langlands, that explanation of how options market makers buy or sell the underlying security when selling options really helps understanding what might be going on here.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by pseudoiterative »

a lot of Tesla Directors / board members cashed their options (not Option trading) but RSUs or ESOP whatever it was like 5 mill, 9 mill, i wonder if somehow its connected to this artificial pump and dump.
-- elderwise

i don't think it is directly related, but more likely Tesla insiders taking advantage of the exuberant demand that a subset of the market has for TSLA stock this year -- some of that demand partly fueled by SoftBank's $250 million TSLA position.

If you were awarded a bunch of stock options from the company that were previously out of the money but are now in the money, then if you dont believe the market price offered for the company's stock is sustainable, or if suddenly you have a life-changing unrealised increase in net worth and you want to lock it in as realised gains, it would make sense to cash in and sell some or all of the options on the market.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Scooter57 »

Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by bluquark »

unclescrooge wrote: Sat Sep 05, 2020 12:45 am Seems like Masayoshi is fueling his gambling addiction via SoftBank.

If I was an investor in that fund, I would be pulling it right now. Actually, I would have pulled after the whole WrWork debacle.
In practice, I see SBG's stock has not moved much in reaction to this news.

SoftBank has been valued at a fraction of the sum of the value of its holdings for years. The likelihood that Masayoshi Son would throw away vast quantities of money on bad investments was already priced in.

Image

(graph from Feb 2020. From https://nymag.com/intelligencer/amp/202 ... tself.html)
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Random Musings »

I was wonderimg why the call to put ratio has been so high each day over the past few weeks. Even on Thursday.

RM
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

Scooter57 wrote: Sat Sep 05, 2020 2:57 pm Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
Unfair characterization IMO. I think you are confusing cause and effect.

It was indexing that abandoned "the idea that investors buy stock because they believe that the company that issued it will grow earnings".

The inflow into momentum stocks has happened because of low interest rates, not gambling by "new day traders".
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by willthrill81 »

000 wrote: Sat Sep 05, 2020 9:12 pm
Scooter57 wrote: Sat Sep 05, 2020 2:57 pm Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
Unfair characterization IMO. I think you are confusing cause and effect.

It was indexing that abandoned "the idea that investors buy stock because they believe that the company that issued it will grow earnings".
Yes and no. The BH principles, while not explicitly but effectively saying precisely this, state that prices don't matter (i.e. 'use index funds', 'never try to time the market', 'stay the course'), at least in the sense of impacting your investment plan. However, the underlying assumption is that this is possible because the markets are purportedly efficient, making such a strategy plausible. So yes, the BH principles and indexing do at least attempt to disconnect investors' purchases from beliefs regarding earnings, but the justification is that the market is already doing that for you and you're just along for the ride.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

willthrill81 wrote: Sat Sep 05, 2020 9:28 pm
000 wrote: Sat Sep 05, 2020 9:12 pm
Scooter57 wrote: Sat Sep 05, 2020 2:57 pm Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
Unfair characterization IMO. I think you are confusing cause and effect.

It was indexing that abandoned "the idea that investors buy stock because they believe that the company that issued it will grow earnings".
Yes and no. The BH principles, while not explicitly but effectively saying precisely this, state that prices don't matter (i.e. 'use index funds', 'never try to time the market', 'stay the course'), at least in the sense of impacting your investment plan. However, the underlying assumption is that this is possible because the markets are purportedly efficient, making such a strategy plausible. So yes, the BH principles and indexing do at least attempt to disconnect investors' purchases from beliefs regarding earnings, but the justification is that the market is already doing that for you and you're just along for the ride.
If prices don't matter and markets are efficient, the counterparties (option writers) to Softbank's alleged options buys would have only written the options with the knowledge of current options volume and any consequential "market moving" events. i.e. there should have been no free lunch in calls.

I think >90% of options writers are sophisticated banks and financial institutions, so the premise that they would be "tricked" into having their own actions move against them seems implausible to me.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by willthrill81 »

000 wrote: Sat Sep 05, 2020 9:34 pm
willthrill81 wrote: Sat Sep 05, 2020 9:28 pm
000 wrote: Sat Sep 05, 2020 9:12 pm
Scooter57 wrote: Sat Sep 05, 2020 2:57 pm Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
Unfair characterization IMO. I think you are confusing cause and effect.

It was indexing that abandoned "the idea that investors buy stock because they believe that the company that issued it will grow earnings".
Yes and no. The BH principles, while not explicitly but effectively saying precisely this, state that prices don't matter (i.e. 'use index funds', 'never try to time the market', 'stay the course'), at least in the sense of impacting your investment plan. However, the underlying assumption is that this is possible because the markets are purportedly efficient, making such a strategy plausible. So yes, the BH principles and indexing do at least attempt to disconnect investors' purchases from beliefs regarding earnings, but the justification is that the market is already doing that for you and you're just along for the ride.
If prices don't matter and markets are efficient, the counterparties (option writers) to Softbank's alleged options buys would have only written the options with the knowledge of current options volume and any consequential "market moving" events. i.e. there should have been no free lunch in calls.

I think >90% of options writers are sophisticated banks and financial institutions, so the premise that they would be "tricked" into having their own actions move against them seems implausible to me.
I agree that it 'should not' have been possible, but I don't know that SoftBank's actions really moved the markets at all.

And for the record, I don't believe in 100% market efficiency, especially in the macro sense.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

willthrill81 wrote: Sat Sep 05, 2020 9:36 pm I agree that it 'should not' have been possible, but I don't know that SoftBank's actions really moved the markets at all.

And for the record, I don't believe in 100% market efficiency, especially in the macro sense.
Ok. So you don't think "SoftBank [is] partially responsible for tech stock rally in recent weeks"?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by willthrill81 »

000 wrote: Sat Sep 05, 2020 9:40 pm
willthrill81 wrote: Sat Sep 05, 2020 9:36 pm I agree that it 'should not' have been possible, but I don't know that SoftBank's actions really moved the markets at all.

And for the record, I don't believe in 100% market efficiency, especially in the macro sense.
Ok. So you don't think "SoftBank [is] partially responsible for tech stock rally in recent weeks"?
Yes, and I said so in the OP, albeit with a caveat.
willthrill81 wrote: Fri Sep 04, 2020 2:49 pm In my mind, a single entity buying billions of options shouldn't have that big of an impact on the market, but I know that options can lead to weird distortions.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by langlands »

000 wrote: Sat Sep 05, 2020 9:34 pm
willthrill81 wrote: Sat Sep 05, 2020 9:28 pm
000 wrote: Sat Sep 05, 2020 9:12 pm
Scooter57 wrote: Sat Sep 05, 2020 2:57 pm Bloomberg reports that the option trades from the new day traders who flooded in during the lockdown dwarf Softbank's admittedly huge option volume. They piled into these mpmrntm stocks when they started to move, amplifying the effect.

But by now the idea that investors buy stock because they believe that the company that issued it will grow earnings is an antiquated relic of the time when it could cost tens or even hundreds of dollars to buy a stock. With free trading stocks, for large numbers of people who buy and sell them, have just become another kind of slot machine to gamble on, albeit one with better odds.
Unfair characterization IMO. I think you are confusing cause and effect.

It was indexing that abandoned "the idea that investors buy stock because they believe that the company that issued it will grow earnings".
Yes and no. The BH principles, while not explicitly but effectively saying precisely this, state that prices don't matter (i.e. 'use index funds', 'never try to time the market', 'stay the course'), at least in the sense of impacting your investment plan. However, the underlying assumption is that this is possible because the markets are purportedly efficient, making such a strategy plausible. So yes, the BH principles and indexing do at least attempt to disconnect investors' purchases from beliefs regarding earnings, but the justification is that the market is already doing that for you and you're just along for the ride.
If prices don't matter and markets are efficient, the counterparties (option writers) to Softbank's alleged options buys would have only written the options with the knowledge of current options volume and any consequential "market moving" events. i.e. there should have been no free lunch in calls.

I think >90% of options writers are sophisticated banks and financial institutions, so the premise that they would be "tricked" into having their own actions move against them seems implausible to me.
As I mentioned above, most options writers are market makers who offload their risk by buying or selling in the underlying stock market. So most of them weren't "tricked." They make a steady income regardless of whether the market goes up or down. In fact, they're probably doing very well. The profitability of market makers is mostly determined by volatility and volume. They like both, as those are both sources of opportunity.

The people who lost against Softbank's call bets are the people who sold their stock when the call writing options makers bought the underlying stock. But who knows, those sellers probably already benefited from the run up.

There's a certain "division of labor" to market efficiency. Market makers make sure that things are microstructure efficient on a daily basis so that the stock market machine is well oiled and everyone can play the game without worrying about the nitty gritty. This allows retails investors, hedge funds, pension funds, etc. (the real money in a sense) to place their bets on where stocks should really be valued, and this is what results in some semblance of macro-efficiency.
Last edited by langlands on Sat Sep 05, 2020 9:46 pm, edited 1 time in total.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by MotoTrojan »

While significant, their options are but a drop in the bucket of calls lately.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by adave »

Seems unlikely any single private entity could control or significantly influence the $10 trillion NASDAQ. My guess is that the big tech stocks simply were too hot and due for some cooling off. It is an interesting story though. My guess is M. Son was just trying to make some quick money to offset terrible WeWork loss - wonder when we will know if he made any money on these positions?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by YRT70 »

Did Thursday's NASDAQ drop start exactly when this article was published? Or how close was it?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by grabiner »

pseudoiterative wrote: Sat Sep 05, 2020 2:43 am There's some good comments in the HN thread about this -- I found the following explanations of the dynamics helpful:
In summary:
1. Softbank has been paying up to buy a mountain of call options on big cap tech stocks.
2. Lots of inexperienced traders have been piling on, buying those same call options, e.g., on Robinhood.
3. The brokers/hedge funds selling those call options have been hedging by... buying big cap tech stocks.
4. Passive funds have been mindlessly following along, "copying the market," getting more and more concentrated on big cap tech.
-- https://news.ycombinator.com/item?id=24377715
1) Shorted dated options have lots of gamma which amplifies the effects of this exponentially.
2) There are very few discretionary investors left, most are index funds. They [softbank] targeted a few [stocks] names which have outsized influence on indices. This in turn forces passives to buy those same names [stocks] in order to keep tracking error low. Which then amplifies the effects from point 1, giving SB pnl which they can lever to repeat the cycle.
Source: hf head of quant trading
(emphasis not in original)
-- https://news.ycombinator.com/item?id=24379040
The bolded quote is not correct. Most index funds are market-cap weighted (for stocks in whatever index they track). If a stock doubles in value, an index fund needs to hold twice as much of the stock, but the value of its existing holding also doubled, so it doesn't need to buy anything. If the index fund receives new money which it needs to invest, it needs to buy the same number of shares whether it buys before or after the rise.

Index funds need to buy and sell stocks disproportionately only when the index changes. If a stock is added to the S&P 500, then S&P 500 index funds need to buy the stock (and if it moved from the mid-cap S&P 400, funds tracking that index need to sell it).
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Croissant »

SoftBank group has effectively made a hedge fund move instead of the traditional 'invest-in-startup' move that you'd expect from a venture fund. despite the wework debacle you can still say Son's overall track record reflects some alpha due to his early Alibaba move (you can call it luck too), but this massive option buying is not in his past demonstrated-area of expertise. time will tell, but surely it means tech portion of SP500 is only going to get more volatile
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by NewMoneyMustBeSmart »

A lot of these comments beg the question that the market is overvalued and Softbank manipulated the market to drive prices up.

What if Softbank/Son saw the effect inflation and QE had on stock values and wagered on that vector? I don't know what happened, but:

1. I'm not sure the market is overvalued

2. I think Softbank/Son has been a permabull on tech for a long time, and this may have been a You Only Live Once ("YOLO") gamble for him/them but it's not out of character.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Valuethinker »

adave wrote: Sat Sep 05, 2020 10:00 pm Seems unlikely any single private entity could control or significantly influence the $10 trillion NASDAQ. My guess is that the big tech stocks simply were too hot and due for some cooling off. It is an interesting story though. My guess is M. Son was just trying to make some quick money to offset terrible WeWork loss - wonder when we will know if he made any money on these positions?
In effect options are a leveraged bet.

I am not sure supply=demand at this point i.e. (more rigorously) supply always equals demand, at a price, but the price has to move up.

If Softbank is taking say, 5% economic positions (options worth 5% of the equity - I haven't seen what they were actually taking) of the FAANG stocks that could be significant.

Also there are a lot of Momentum traders out there, so higher stock price, higher momentum, triggers more buying. If there are cash inflows into index funds, the same is true.

So I think it is plausible actions on this scale by Softbank have disrupted the market.

20% of the net assets of Berkshire Hathaway are now Apple. I never thought I'd write those words. (It also creates another feedback effect, as a higher Apple price means a higher BH price, thus driving the market higher).
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by csantiago »

000 wrote: Fri Sep 04, 2020 5:09 pm Is there any hard evidence it was SoftBank or is this just gossip?
Yes, they've parsed their recent 13-F fillings.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by 000 »

csantiago wrote: Mon Sep 07, 2020 5:10 am
000 wrote: Fri Sep 04, 2020 5:09 pm Is there any hard evidence it was SoftBank or is this just gossip?
Yes, they've parsed their recent 13-F fillings.
Is there any evidence that their trades moved the market or (as suggested above) were part of a criminal conspiracy?
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by LFS1234 »

The WSJ on 9/04 reported the following:

"Regulatory filings show SoftBank bought nearly $4 billion of shares in tech giants such as Amazon.com Inc., Microsoft Corp. and Netflix Inc. this spring, plus a stake in Tesla. Not included in those disclosures is the massive options trade, which is built to pay off if the stock market rises to a certain level and then lock in gains.

"SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought, as well as on other names, according to people familiar with the matter. It also sold call options at far higher prices. This allows SoftBank to profit from a near-term run-up in stocks and then reap those profits by unloading its position to willing counterparties."

https://www.wsj.com/articles/softbanks- ... 1599232205

Bloomberg on 9/07 quoted analysts pointing out that "the heft of large institutional players remains relatively small compared with the rest of the market", and that "retail punters shelled out $40 billion in call premiums in a month". Bloomberg further reported that "Individual investors have been piling into call options that usually expire within two weeks. The short-term nature of the contracts requires hedging by market makers, which in turn fanned higher stock prices. In contrast, trades favored by large institutions don’t necessarily require market makers to buy and sell the underlying stock to hedge themselves" because institutions "tend to use strategies such as buying a call spread and selling the underlying shares -- a technique to profit from a rally, but also limit risk".

https://www.bloomberg.com/news/articles ... ing-doubts

My interpretation of the Bloomberg article's conclusion is that Softbank's option bets are significant but that retail investors' option bets have been having an even greater influence on the market for certain tech stocks.

This situation reminds me of an inverse 1987, when "portfolio insurance" (involving massive sales of futures) helped cause a 22.6% one-day drop in the DJIA. So now instead of having institutions selling futures and thereby driving prices down, we've got retail investors buying tens of billions of dollars of short-term calls and thereby driving prices up (by forcing those on the other side of those trades to buy a whole lot of the underlying stock).

Often, major market downside moves seem to happen on Mondays. This was the case in 1929 and 1987, among others. There are lots of "Black Mondays". The theory is that after a few days of worrisome downside market jiggles (like we had in tech stocks on Thursday and Friday), highly-leveraged investors have a weekend to contemplate their portfolios and to transition from "greed-on" to "greed-off" mode. On Monday, when they're ready to sell, so are a great many others similarly situated. The momentum then feeds on itself. We can't have a Black Monday this week since the US market was closed, but we could have a "Black Tuesday". Or the adjustment could happen later. I'd be surprised if there isn't a major adjustment at least in Tesla stock within the next month or two.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by langlands »

LFS1234 wrote: Mon Sep 07, 2020 8:02 pm I'd be surprised if there isn't a major adjustment at least in Tesla stock within the next month or two.
That's quite a specific prediction. If you would truly be surprised, you should buy Tesla put options to profit. I'd recommend Jan 2021 expiry with strike around 300 depending on exactly how "major" of an adjustment you expect.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by LFS1234 »

langlands wrote: Mon Sep 07, 2020 8:16 pm
LFS1234 wrote: Mon Sep 07, 2020 8:02 pm I'd be surprised if there isn't a major adjustment at least in Tesla stock within the next month or two.
That's quite a specific prediction. If you would truly be surprised, you should buy Tesla put options to profit. I'd recommend Jan 2021 expiry with strike around 300 depending on exactly how "major" of an adjustment you expect.
I don't speculate with options, I do strictly long-term investing and my typical holding period is measured in decades. I do enjoy market-watching, and it seems to me that I've seen this movie before, in 1999-2000. Since I'm still in the accumulation mode, I would welcome lower prices. The most that I'd be willing to bet, however, is a very nice steak dinner with a very good bottle of wine.

Here's a more specific prediction, just for the fun of it: I hereby predict that Tesla will close below 270 on at least one day between tomorrow and November 1st of this year. That would be 35% off its Friday close and 46% off its all-time high.

Postscript 11/01/2020: On the final trading day of October, Tesla closed at 388. The lowest it got during the period of my proposed bet was 330, so I would have lost the bet if it had been made.
Last edited by LFS1234 on Sun Nov 01, 2020 11:14 am, edited 1 time in total.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by sycamore »

LFS1234 wrote: Mon Sep 07, 2020 8:59 pm
langlands wrote: Mon Sep 07, 2020 8:16 pm
LFS1234 wrote: Mon Sep 07, 2020 8:02 pm I'd be surprised if there isn't a major adjustment at least in Tesla stock within the next month or two.
That's quite a specific prediction. If you would truly be surprised, you should buy Tesla put options to profit. I'd recommend Jan 2021 expiry with strike around 300 depending on exactly how "major" of an adjustment you expect.
I don't speculate with options, I do strictly long-term investing and my typical holding period is measured in decades. I do enjoy market-watching, and it seems to me that I've seen this movie before, in 1999-2000. Since I'm still in the accumulation mode, I would welcome lower prices. The most that I'd be willing to bet, however, is a very nice steak dinner with a very good bottle of wine.

Here's a more specific prediction, just for the fun of it: I hereby predict that Tesla will close below 270 on at least one day between tomorrow and November 1st of this year. That would be 35% off its Friday close and 46% off its all-time high.
So far that prediction is looking pretty good: TSLA down 21% today to 330. Another 18% or so to 270...
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by Croissant »

LFS1234, as another market watcher, we need more predictions! :D
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by csantiago »

000 wrote: Mon Sep 07, 2020 4:54 pm
csantiago wrote: Mon Sep 07, 2020 5:10 am
000 wrote: Fri Sep 04, 2020 5:09 pm Is there any hard evidence it was SoftBank or is this just gossip?
Yes, they've parsed their recent 13-F fillings.
Is there any evidence that their trades moved the market or (as suggested above) were part of a criminal conspiracy?
We'll find out when the SEC tells us.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by lostdog »

LFS1234 wrote: Mon Sep 07, 2020 8:02 pm The WSJ on 9/04 reported the following:

"Regulatory filings show SoftBank bought nearly $4 billion of shares in tech giants such as Amazon.com Inc., Microsoft Corp. and Netflix Inc. this spring, plus a stake in Tesla. Not included in those disclosures is the massive options trade, which is built to pay off if the stock market rises to a certain level and then lock in gains.

"SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought, as well as on other names, according to people familiar with the matter. It also sold call options at far higher prices. This allows SoftBank to profit from a near-term run-up in stocks and then reap those profits by unloading its position to willing counterparties."

https://www.wsj.com/articles/softbanks- ... 1599232205

Bloomberg on 9/07 quoted analysts pointing out that "the heft of large institutional players remains relatively small compared with the rest of the market", and that "retail punters shelled out $40 billion in call premiums in a month". Bloomberg further reported that "Individual investors have been piling into call options that usually expire within two weeks. The short-term nature of the contracts requires hedging by market makers, which in turn fanned higher stock prices. In contrast, trades favored by large institutions don’t necessarily require market makers to buy and sell the underlying stock to hedge themselves" because institutions "tend to use strategies such as buying a call spread and selling the underlying shares -- a technique to profit from a rally, but also limit risk".

https://www.bloomberg.com/news/articles ... ing-doubts

My interpretation of the Bloomberg article's conclusion is that Softbank's option bets are significant but that retail investors' option bets have been having an even greater influence on the market for certain tech stocks.

This situation reminds me of an inverse 1987, when "portfolio insurance" (involving massive sales of futures) helped cause a 22.6% one-day drop in the DJIA. So now instead of having institutions selling futures and thereby driving prices down, we've got retail investors buying tens of billions of dollars of short-term calls and thereby driving prices up (by forcing those on the other side of those trades to buy a whole lot of the underlying stock).

Often, major market downside moves seem to happen on Mondays. This was the case in 1929 and 1987, among others. There are lots of "Black Mondays". The theory is that after a few days of worrisome downside market jiggles (like we had in tech stocks on Thursday and Friday), highly-leveraged investors have a weekend to contemplate their portfolios and to transition from "greed-on" to "greed-off" mode. On Monday, when they're ready to sell, so are a great many others similarly situated. The momentum then feeds on itself. We can't have a Black Monday this week since the US market was closed, but we could have a "Black Tuesday". Or the adjustment could happen later. I'd be surprised if there isn't a major adjustment at least in Tesla stock within the next month or two.
I wonder if the retail investors are mostly Robinhood.
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by LFS1234 »

Interesting article today in the Wall Street Journal:

https://www.wsj.com/articles/the-wildly ... 1599989400

From the article:

"Small investors bought call options with roughly $500 billion of notional value in August, says Benn Eifert, managing partner of $125 million hedge fund QVR Advisors, citing data from the Options Clearing Corp. That’s five times the previous monthly high for these smaller accounts, reached in early 2018.

“The trading of options over the last six months, particularly by small traders, is quite incredible and off the charts,” says Mr. Eifert, whose firm is active in options markets. “It’s a steamrolling trend that’s having a very meaningful dynamic for markets.”
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Re: SoftBank partially responsible for tech stock rally in recent weeks?

Post by bck63 »

LFS1234 wrote: Sun Sep 13, 2020 9:34 am Interesting article today in the Wall Street Journal:

https://www.wsj.com/articles/the-wildly ... 1599989400

From the article:

"Small investors bought call options with roughly $500 billion of notional value in August, says Benn Eifert, managing partner of $125 million hedge fund QVR Advisors, citing data from the Options Clearing Corp. That’s five times the previous monthly high for these smaller accounts, reached in early 2018.

“The trading of options over the last six months, particularly by small traders, is quite incredible and off the charts,” says Mr. Eifert, whose firm is active in options markets. “It’s a steamrolling trend that’s having a very meaningful dynamic for markets.”
"The Journal" podcast was about this same subject on Friday.
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