SoftBank stock took a spill Monday after the company was "unmasked" as the "Nasdaq whale" behind the recent melt-up, but the theory has flaws.
Japanese multinational conglomerate SoftBank saw its stock price fall 2% Monday after a weekend news report about the company’s bold foray into risky options markets.
The Financial Times report published Friday passed along interesting revelations by anonymous sources. They say SoftBank bought so many bullish call options linked to certain tech stocks that it made a whale-sized splash of record trading volumes for contracts to buy them.
The Times article claims dramatically that the “Nasdaq whale” behind the recent tech stock melt-up has been “unmasked.”
Watch Bloomberg’s Dani Burger report on SoftBank’s substantial bets in equity derivatives:
SoftBank stock fell Monday because investors are worried that its long position in tech stocks may be in peril after the Nasdaq Composite wobbled last week. With markets open, SoftBank shares fell as much as 5.7%–the worst intraday decline since April.
Mitsushige Akino, senior executive officer at Ichiyoshi Asset Management, said without knowing SoftBank’s position in options today, investors are worried the company could sustain heavy losses if this summer’s blazing equity rally is over:
SoftBank was riding the Nasdaq wave like a mutual fund. The market is falling now, and investors have zero visibility, so they are selling SoftBank stocks.
The market’s reaction to the Nasdaq whale theory is a bearish sign for the tech-driven index. All the interest in the Nasdaq whale theory reveals a lack of trust in tech stock valuations.
Investors swiftly punishing a company for taking a massive long position in tech with call options reveals they think Nasdaq stocks are toxic at the moment.
On Sunday, a detailed Twitter explainer by Benn Eifert cast doubt on the theory. The chief investment officer of hedge fund QVR Advisors shared a pile of evidence pointing to the negligible effect of SoftBank’s recent call-buying spree on the Nasdaq level.
SoftBank reportedly bought $4 billion in equity derivatives for tech stocks over the past few months. By contrast, Eifert points out OCC data show small retail investors bought $40 billion in premium call options over the last month alone.
If we assume “past few months” is six months, SoftBank’s purchases in this market could account for as little as 1.6% of the retail crowd’s purchase volume. And the retail market’s demand for options is also a fraction of the entire market.
Goldman Sachs data show the entire U.S. equity options market for stock calls and Index/ETF calls is north of $500 billion on a ten-day rolling average.
These transactions themselves did not represent meaningful buying pressure.
It’s strange for the Times, the Wall Street Journal, and ZeroHedge to scapegoat SoftBank as the cause of overbought Nasdaq stocks. It’s hardly been the only bull for tech stocks this summer.
The entire options market itself is dwarfed by the volume of liquidity pouring out of the world’s central banks. Quantitative easing and stock melt-ups go hand in hand; that’s textbook finance. If overbought equities correct sharply, point the finger at the Federal Reserve.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 23, 2020 2:29 PM