SoftBank just doing its thing

The Nasdaq whale driving the markets

Anshil Bhansali, Sep 13, 2020

I was inspired to write this piece after some weekend reading about Softbank. Recently, there has been considerable evidence that Softbank is the new Nasdaq whale that has been buying up call options and driving tech stocks to the bubbly valuations that they have right now.

Softbank is the vision fund led by Masayoshi son, who made his fortune by investing in Alibaba at an early stage. His initial $20 million investment in 2000 turned into $100 BILLION dollars. After that, it only seems like that moonshot success went to his head, and Softbank has invested in almost every risky tech startup in the private world. WeWork, Uber, and almost every other tech startup had huge private valuations because of Softbank. WeWork's last private funding round valued it at $42 billion, only to be demolished by wall street when they tried to IPO. Uber's last private valuation was $120 billion, look at its valuation now.

Now, there is enough evidence that Softbank has entered the public equities market, buying up lots and lots of call options of publicly traded trendy tech companies - APPL, ZM, DOCU etc. That can only explain ZM's recent intraday 40% jump for such a large company. Usually we only see that in penny stocks, not mid/large cap companies.

Look at WSJs article on how Softbank has been fueling the market rally. What I wanted to touch upon was exactly how Softbank has been gaming the markets. It is through the Gamma Squeeze. It was done with Call options.

A Call Option is a derivative security who's value is derived from the underlying stock price, expiration time and general demand/supply. Buying a call option gives the buyer the option to buy the underlying stock at a certain price before a certain date. Selling a call option means you collect a premium ($$$), but you are obligated to sell the underlying stock, IF the buyer wants to execute the option and buy the shares.

Softbank has been buying a lot of call options. Goldman Sachs has spotted a historic inversion in the equities market. Goldman has observed that the average daily value of options traded has exceeded that of stocks.

To simplify what has been happening here - Softbank buys a lot of call options. For each buy, there is some other party or person selling the call option. Now if the stock price goes up, Softbank makes a lot of money, but the seller of the option has lost money. What usually happens is that the seller of a call option would usually buy the underlying stock to hedge their risk. Now imagine this on Softbank's scale. This creates an upward spiral pressure on the stocks because of the sellers buying the underlying stock to hedge their risk, and Softbank itself buying up the shares when the call options execute. This results in valuations that far exceed business prospects, even though the pandemic has been helping tech companies. The valutions are just too damn high.

This nasdaq whale, along with the surge in retail traders on Robinhood and unlimited liquidity provided by the Fed is driving the stock market into a bubble that can burst by the slightest of uncertain news.