Question: What happens when SoftBank dabbles in the Options market?

Answer: An alter ego emerges — The NASDAQ Whale


The Story

Most people think the only way you can bet on a company is by having part ownership in the company. That way if the company’s stock price appreciates, you can walk away with some money. But this assessment isn’t entirely accurate. You can also bet on a company without explicitly buying the stock.

For instance, imagine you see shares of your favourite tech company trading at Rs. 80 today. Now you believe this stock will rally and reach Rs. 120 anytime soon. The only problem — if you wanted to buy 1,000 shares right now, you’d have to cough up Rs. 80,000 — a rather steep amount. But what if you could change the nature of this bet a  tiny bit? What if you could find someone who’s willing to hear a different proposition? More importantly, what if you could make him an offer he couldn’t refuse?

So you set the agenda. You ask him what he thinks about your favourite tech stock? He tells you he isn’t very optimistic. He makes it explicitly clear that the upside is fairly limited. He mocks your optimism and offers you his unabashed opinion.  “It won’t cross Rs. 90 in the next 6 months. I’ll give it to you in writing”, he says. You are overjoyed. This is exactly what you wanted to hear. So you ask him to give it in writing — a contract of sorts.

The premise is simple. You pay him a small premium — Rs. 10 for each stock. And since we are talking about 1,000 stocks here, you have an obligation to pay up Rs. 10,000. That’s good money. In return, your friend is expected to make a promise. He must produce 1,000 stocks at Rs. 90 (anytime during the next 6 months*), if you ever make an explicit request.

It doesn’t matter what the stock price does — whether it goes up, whether it goes down or whether it goes to Rs. 120. He must still furnish  the 1,000 shares and sell them to you at the predetermined price.

And if everything works out i.e. if the stock price does go to Rs. 120, you could make a whole lot of money. All you have to do is exercise your  “option” to buy the shares at Rs. 90 and sell them immediately at Rs. 120. That’s Rs. 30 on each share. Add it up across 1,000 shares and you are walking away with Rs. 30,000 — all by paying that small premium of Rs. 10,000.

Granted if the stock price goes to Rs. 70, then there’s no point in buying the shares at Rs. 90. In which case, you simply walk away without exercising your option. You can’t recover the premium you paid. And you have to let it go. It’s all part of the gamble. But if it does work out in your favour? That would solve a lot of your problems, no?


So this contract note is called a “Call Option”. Traders use it to make some quick cash. Investors use it to protect their downside and SoftBank uses it to…. well, move the damn market.

So here’s what we know. SoftBank paid roughly $4 billion in premiums to own the option of buying (or selling) $50 billion worth of tech stocks. Tech stocks like Apple, Microsoft and Tesla. Now when somebody starts buying these options en masse, they are also signalling something. They are telling the world they expect the price of these stocks to appreciate soon enough. And this triggers a feedback loop where other people start buying the actual stocks under the presumption that a rally is imminent — thereby fulfilling their own prophecy.

In effect, we saw a massive rally in tech stocks until last week when it fizzled out after prospective investors probably thought it was getting a bit out of hand. A big rally followed by a sudden dip — It’s a story we’ve heard all too often. Now bear in mind, most people weren’t aware it was SoftBank making these bets. They simply called the entity — the NASDAQ whale. Because it’s massive and it's gobbling up everything.

Why NASDAQ, you ask?

Well because NASDAQ happens to be a market index that tracks the performance of many stocks listed in the US. Sort of like NIFTY you know? But there is a caveat here. The performance of a few tech stocks weigh heavily on the performance of NASDAQ. So if tech stocks were rallying, NASDAQ will rally in tandem. And therefore it makes sense to call SoftBank the NASDAQ whale. Get it?

So the only question then—Why exactly is SoftBank doing this?

We don’t know yet. Some say they have a lot of money to spare and this is a conscious effort to extract sizeable returns from publicly traded stocks. Even others contest that this is a desperate gamble to make billions and paper over the cracks with their other more private investments. #WeWork

But bottom line — Irrespective of why it’s happening, the NASDAQ whale has finally been unmasked. So with that, we wrap up this story.

*Point of Interest: American Options can be exercised anytime before expiry. European Options (which is what we have in India) can be only exercised on the expiration date.

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Recommended Reading

The Herbalife Bet

It’s always fascinating to hear about billion dollar hedge funds making bold secretive bets. But what happens when these companies go public about their intentions?

Well, that’s a story on its own.

So in today’s recommended reading we look at the Herbalife bet — when hedge fund managers Bill Ackman, Dan Loeb and Carl Icahn fought a bitter public  war over the fate of a billion dollar nutrition and weight management company.

P.S. This story was written in 2013. So bear in mind, lot has changed since then.

Until next time :)

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