Up or down?
Which way will stocks head from here?
With a 3-day pause, investors have much to weigh for the coming week of trading, including a recent tech sell-off and possible rotation into the market’s weaker sectors. Last Wednesday, the buying frenzy hit its peak.
Now, bulls are trying to rationalize whether another move higher makes sense.
Analysts had pegged amateur traders – millennial Robinhood speculators – for causing the stunning run-up in derivatives. Call options outpaced their underlying stocks in historic fashion, pushing leverage to the max while both share prices and the CBOE Volatility Index (VIX) soared. In fact, just last week, the VIX hit its highest level ever while the S&P 500 was simultaneously trading at a record high.
However, as investors have now learned, amateurs weren’t solely responsible for late August’s “bullish blast.” They certainly played a role in the events that unfolded over the last few weeks, but it was the pros – hedge funds and investment banks – that did most of the initial string-pulling.
And one, in particular, led the pack in that regard:
SoftBank, a Japanese multinational holding company.
For those in the west, the name SoftBank might not mean a whole lot. But to more worldly investors, it’s the “Berkshire Hathaway of tech.” CEO and owner Masayoshi (Masa) Son is the second-richest man in Japan.
In other words, SoftBank and Masa Son are a big deal. With over $100 billion in capital, the company could potentially have a significant influence on the market by making sizable purchases.
Which, incidentally, is exactly what SoftBank did. It was revealed in a recent earnings call that on August 11th, the company acquired major holdings in some of the market’s top tech stocks: FAANG, Microsoft, and Tesla (among others) in a $10 billion gambit.
Surprisingly, though, SoftBank also purchased vast quantities of options on the stocks it was directly investing in. The result was a huge “gamma loop,” in which gamma-positive options – long calls and puts – fueled a spike in implied volatility and their underlying stocks. SoftBank’s maneuver spurred-on another bullish swell as retail investors carried that momentum upward the rest of the way.
Current estimates have SoftBank’s profit at $4 billion. What’s more, because implied volatility has remained high on the options for the stocks Masa Son selected, it’s believed that SoftBank is still long on those positions.
Equities got crunched over the last two trading sessions, of course. Big Tech, and SoftBank’s targets, plunged.
Don’t be surprised if SoftBank decides to “cash-out” later this week as a result. The telling sign should be a drop in implied volatility. If that happens, SoftBank’s play could be over.
Or, it could simply be an indication that the Robinhood-types are heading for the hills before the hedge funds do.
Either way, options will likely foretell the market’s short-term future.
Arguably more than they ever have before.
And for a market that’s trading near its all-time highs, that’s scary stuff; it’s an anomaly that could lead to even more volatility down the road.
All while a number of other “sell signs,” like the upcoming presidential election or a possible coronavirus setback, are waiting in the wings.
