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What happens if a r/WallStreetBets member hits billionaire status
‘Make your money work for you’ is a very common personal finance tip. Softbank’s CEO, Masayoshi Son just put $4 Billion at work. The investment was so huge that he and his company are now being touted as the whale behind the historic rally in US Tech Stocks. S&P 500 was up 6.6% in August, it’s best August since 1986. In August alone, Tesla’s share price shot up 74 percent, while Apple gained 21 percent. While the rally could be attributed to the news of impending stock split, other tech giants also scaled new heights in the rally. Google’s parent Alphabet rose 10 percent, and Amazon rose 9 percent.
What exactly happened here? How much did Softbank make out of this enormous financial wizardry? And what are the repercussions of the move? We try to explain it in today's article.
What Did Softbank Exactly Do?
According to the Wall Street Journal, SoftBank’s regulatory filings show it bought nearly $4 billion in call options of Amazon, Microsoft, and Netflix, plus a stake in Tesla. The paper quoted a source stating SoftBank spent roughly $4 billion buying call options tied to its stock holdings, but also in other names. The call options purchased by SoftBank gave it exposure to approximately $30 billion in the stock of big tech companies. It then could profit from the run-up in stocks and subsequently unload its position to other parties. Combined with the retail investments in Call options via Robinhood and other such platforms, the overall nominal value of calls traded on individual US stocks has averaged $335bn a day over the last two weeks of August, according to Goldman Sachs. That is more than triple the rolling average between 2017 and 2019.
(Image Credits: Alessandro Di Ciommo/NurPhoto/Getty)
What Exactly Are Call Options?
A call is an option contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time. The specified price is known as the strike price and the specified time during which a sale is made is its expiration or time to maturity. The market price of the call option is called the premium. It is the price paid for the rights that the call option provides. If at expiry the underlying asset is below the strike price, the call buyer can choose not to buy the shares and loses the premium paid. This is the maximum loss. If the underlying price is above the strike price at expiry, the profit is the current stock price, minus the strike price and the premium. This is then multiplied by how many shares the option buyer controls.
Is This Bet Responsible for the Rally?
As the contract would give the best results when the underlying stock would rise, a call option is a signal of a positive outlook for the underlying stock. Softbank invested $4 Billion into such contracts. Add another $40 Billion invested by the retail investors in the month of August, according to this report by the Financial Times and you have a market rally at your hands. Such trades would trigger the rally in 2 ways. First, which is the obvious signaling which bets of such huge volumes would give, that the people and institutions investing in these bets have a positive outlook and that the underlying stocks would rise. Markets acted upon this signal and invested a huge amount of money in US Tech stocks.
Second, the players who write, or sell, the call option contracts also need to hedge their trade. There are many ways in which he can do that. One of the ways is to buy a certain quantity of shares for which he/she has sold the options contract. So if the stock price rises, he will lose money on the call option he wrote. But those losses will be partly offset by the profit on the shares with him.
On Nasdaq, many of the call option writers would have bought shares of the stocks on which they had written the options. When too many option writers buy shares to hedge their trades, the prices of those shares could flare-up, which it did in this particular case.
What Are the Repercussions of This Bet?
Call Options are a risky bet. Don’t believe us? Go to r/wallstreetbets and search for the Loss flair. These bets are especially risky when made by a company like Softbank that is generally involved in long term private equity investments in up and coming tech startups. Such trades by them would surely cause panic amongst its shareholders who believe SoftBank should play the role of private equity investor and enable startups to reach the IPO stage rather than trade in option contracts. “It’s just a trip to the casino,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “If they’re supposed to be an investment company taking a long-term horizon, then trying to juice your short-term return through options, you’ve turned into a hedge fund.”
The underlying stocks and the US Tech stocks in general also witnessed major corrections and suffered their worst sell-off since the depths of the market turmoil in March, with the Nasdaq Composite diving into correction territory and Tesla losing more than a fifth of its value in a single day. Bill Gates lost $2.05 billion, Mark Zuckerberg lost $4.26 billion, and Jeff Bezos lost $7.94 billion. But it was Elon Musk and Tesla who took the biggest hit, with the firm's shares having their worst day ever, closing down 21.1 percent at $330.21 and taking losses since last week's record high to 33 percent. The carmaker is now valued at $308 billion, compared to more than $420 billion earlier this month.
Will Softbank Investors Pushback?
SoftBank’s shares plunged more than 7% in the second week of September, wiping out roughly $8 billion in value, as investors reacted to reports that the Japanese conglomerate has been making massive bets on major tech stocks. At one end of the spectrum, it is selling assets to fund a share buyback and debt reduction, most recently selling ARM to Nvidia, on the other end it is moving markets with its trades in call What the markets and the general public don’t know is what triggered this move and what made Softbank place such huge bets on US Tech Stocks. Maybe such questions will be put to the Board in future investor calls. It appears to be an effort to maximize returns via short term strategies utilizing a huge corpus of cash that Softbank has or it can also be an attempt to make billions and paper over the cracks with their other more private investments such as Uber and WeWork. What we surely know is that the Whale of NASDAQ has now been unmasked and that the value investment proposition is not the only investment strategy that Softbank is selling to its investors. It is evident that either Masayoshi Son knows how to ‘Make your money earn for you’.
Dilip Mishra is a B.Com (Hons.) graduate from the University of Delhi and has previously worked with S&P Global Market Intelligence as a Data Researcher.