Markets stocks

We’re All SoftBank. We’re All Masayoshi Son. We’re All Robinhood.

The market did not appear to be amused with the idea of Masayoshi Son, gunslinging riverboat gambler.

Investors on Monday delivered their verdict vis-à-vis Son’s multi-billion dollar speculative bet on further gains in high-flying US tech stocks, pushing shares of SoftBank more than 7% lower to start the week.

News that the Japanese conglomerate spent billions buying calls on mega-cap US tech names won SoftBank the somewhat dubious title of “Nasdaq whale” Friday, fanning concerns that Son “is embarking on a risky endeavor in unfamiliar territory”, to quote a somewhat euphemistic assessment from Bloomberg Television.

To recap, for the umpteenth time in a week, early in August, Son announced a new asset management arm targeting stakes in publicly-traded companies, with Apple, Amazon, and Facebook among the first investments. Subsequent reports suggested the new unit would spent nearly 20 times its initial capital of $555 million.

But the structure of Son’s wagers on the US tech space “have been deeply controversial even within SoftBank”, sources told FT, whose reporting over the last 72 hours is rife with language that suggests the positions were met with palpable internal consternation, most of which echoes familiar, yearsold criticism of Son and high-profile flameouts.

Read more: Whale Tales And Riverboat Gamblers — The Story Of 2020’s Summer Tech Bonanza

“When there is a tech bubble, Son is usually not too far away from the action”, Nikkei quotes one senior markets strategist as saying on Monday, underscoring why there’s a generalized sense of angst around these trades.

It doesn’t help that SoftBank’s positions have been placed in the context of what, on a generous interpretation, can be described as retail investor “froth” in the options market around the same stocks. A less generous interpretation might lead one to call it a retail “mania”, which began earlier this year.

As documented a half-dozen times (at least) over the past month, and crystallized Sunday in “Frankenstein“, Son and other institutional investors have seemingly managed to piggyback on months of speculative call-buying by small-time players, subsumed derisively under the “Robinhood’ers” label.

That, in turn, turbocharged the self-feeding gamma loop, which then drove up the value of existing holdings in the underlying. All of this into a market that was already operating under the kind of “perpetual motion machine” dynamic described by Howard Marks more than three years ago.

Toss in the compelling (to say the least) fundamental case for tech in a post-pandemic world, and you get parabolic nonsense, for lack of a better way to describe this situation.

Myriad reporting on what has already become an absurdly over-exposed story, cites the following chart from Jason Goepfert, of Sundial Capital Research, who on Friday noted that “the smallest of traders… have gambled nearly $40 billion on stocks” in a month. The visual (below) is a fixture of the social media frenzy around this tale.

“The dip in stocks… was not enough to deter options traders”, Goepfert wrote. “In fact, they doubled down, spending even more on speculative upside calls”. Now, small traders’ notional exposure is up to some $500 billion, apparently, versus Son’s $30 billion.

On one hand, it’s understandable that this story has received the attention it has. After all, there’s no more compelling, more accessible narrative in the market than US tech’s inexorable rally and these dynamics are a big part of it.

On the other hand, the associated coverage (whether on social media, blogs, or in the mainstream) is becoming unduly obsessive. In one particular case (which, in keeping with my steadfast commitment to avoid directly disparaging anyone, I won’t mention by name), it’s borderline manic, underscoring longstanding, sincere concerns about the author’s apparently undiagnosed (and certainly untreated) Bipolar 1.

SoftBank is, of course, a sizable holding for all kinds of “big league” (sorry) investors, but suggesting that this particular roll of the dice from Son somehow puts the public finances of Norway in jeopardy or imperils the balance sheet of the Bank of Japan, is patent nonsense.

Remember, the entire world is, in one way or another, long US tech, whether it’s via “lottery ticket” OTM calls, call spreads, outright ownership of the shares, an index fund, a 401(k), or something as simple as owning an iPhone, ordering from Amazon, binge-watching Netflix, or relying on Zoom to conduct business in the new work-from-home regime.

To quote the rallying cry from every pandemic-related corporate marketing campaign, “we’re all in this together”. We’re all bullish US tech. We’re all Masayoshi Son. We’re all the “Mighty Call Trading Legion” of small investors betting big on the FAAMG cohort.

Because each and every day, we wake up and gamble a piece of ourselves on the assumed viability of a reality in which the world only turns because Apple, Amazon, Google, Facebook, and Microsoft, say it does.


 

13 comments on “We’re All SoftBank. We’re All Masayoshi Son. We’re All Robinhood.

  1. joesailboat says:

    “in which the world only turns because Apple, Amazon, Google, Facebook, and Microsoft, say it does.”
    Ben Franklin would be so proud of us. The lightning rod and battery have come a long way.
    Post Industrial, Financializations apogee presently,we need some future and this is the Choo-Choo leaving the station. Hopefully the engine is strong enough to pull all the cars,3rd class included, up the hill.

  2. Vlad is Mad says:

    Let’s define a possible future irony: say NDX rallies 30% above the recent highs. Son’s payoff ratio is 7x vs the premium spent. Then he goes from goat to visionary once again as he turns $4bn, into $28bn.

    • Mr. Lucky says:

      “Because each and every day, we wake up and gamble a piece of ourselves on the assumed viability of a reality in which the world only turns because Apple, Amazon, Google, Facebook, and Microsoft, say it does.”

      Exactly. And every day we all make tacit decisions that each and every one of our holdings represents the optimal choice we can make with the funds we have invested. Else we should sell those holdings and buy the better choice. A hold is an investment decision.

    • BasX says:

      Lol, or the rally falters and he bleeds theta until the options expire worthless. Can’t even imagine the theta decay on a multi-billion option portfolio.

      But that’s a simplistic view. I imagine he’d be (at least partially) delta hedged, employing a ton of spreads to limit the theta bleed, and rolling 6m or 1y. That’d minimize theta and he can just keep banking on gamma/Vega as price moves and vol spikes. I mean, if you have billions of dollars to play with options, going purely long calls is pretty fkn stupid.

  3. babeinwoods says:

    “assumed viability of a reality”… well put.
    There is a real reality underpinning the world of FAAMG.

  4. Darkstar says:

    Perhaps somebody can explain something to me (I’m somewhat new at wading into the deep end of the pool here re options). I read that “somebody” bought 90,000 AAPL 125 c 9/11 on Friday. I can’t look it up right now, but let’s assume the delta on those calls is 0.1. Doesn’t that mean the market maker would have to buy 900,000 shares of AAPL to hedge? (Which of course drives up the price). And if my understanding is correct, here’s my question: why did the market maker sell those calls? I mean, obviously, to make money – but doesn’t that make the market maker a “gunslinging riverboat gambler” too? Excuse me if I’ve misunderstood any of this…

    • Canuck says:

      The market maker is like the casino owner, the odds are a little in his favour. If he gets his hedging and his math right, he slowly comes out ahead.

    • The delta is closer to 0.5.

      In any case, if it were 0.1, as the call seller you would need to buy 9,000, not 90,000, shares. But as the price rises, delta increases, and the call seller would have to buy more shares.

    • Tom says:

      Actually, 90,000 contracts represent 9,000,000 (not 900,000) shares. If exercised that would equate to a greater than $1 billion transaction.

      I checked September 11 Apple calls contracts and for the $125 strike price open interest as of Friday’s close stands at 26,568. Conversely, volume as of the close on Friday stood in excess of 90,000 contracts (at 92,871). Perhaps that is what you read.

      As a footnote, an overwhelming majority of call options contracts are settled (or rolled forward) as opposed to exercised.

      • John Taylor says:

        All this fancy talk has skipped by the answer I believe that is called for. The guy short to offset the purchase is ALSO a riverboat gambler. The whole market is priced into that position. All the other answers are basically why the cover writer can have better odds. This market is very risky as soon as you step in.

        • well the hedger is simply hedging, if the stock goes down in price he keeps the premium. the hedger is simply using some of the premium to hedge and it is the owner of the option who take the risk and is slinging

        • Darkstar says:

          Thanks John, yes that’s the answer I was looking for – or, as H put it – “We are all Robinhood.” And, if as Manuel said above, the delta is actually 0.5, that’s yikes – that’s 4.5 million shares needed to hedge. Which is fine, unless Apple tanks this week, leaving the MM with the premium paid but holding the bag (of course he hopes AAPL closes Friday at 124.99). But as Tom said, maybe I’m mistaken – I thought I heard there was a single buyer of 90,000 calls. Anyway, thanks everybody for your thoughts. Anyway, I’m keeping my head down – seems like this market is skating on thin ice, and November – January looks like it will be a shitshow of biblical proportions.

  5. Anonymous says:

    Retail $40bn in a month, $500bn notional (probably not delta neutral and at rich vols). Not a long term winning investment strategy.

    But with indexers and closet indexers that don’t sell it can (and did) in the short run.

    The excess is amazing. I suspect there are going to be some good opportunities in the not too distant future.

    The casino is rocking and the house (dealers) win in the long run. Crazy vol out there (implieds).

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