SoftBank stock market bets contributed to recent jump in tech shares

Soft Bank Group Corp is displayed at Soft Bank World 2017 conference in Tokyo

Soft Bank Group Corp is displayed at Soft Bank World 2017 conference in Tokyo

On Friday, the Financial Times pulled Softbank out of the Japanese investment group, the "Nasdaq Whale" whose alternative business began a watchdog rally in tech stocks before a rebellious market correction this week. One banker described it as a "dangerous" bet.

It has been under pressure from hedge fund Elliott Management to use this cash to pay down debt and buy back shares, after its attempt to raise a second $100 billion Vision Fund struggled because of the lukewarm investment performance of its predecessor and faltering bets.

Now it has also made a splash in trading derivatives linked to some of those new investments, which has shocked market veterans.

Raymond James market strategist Ellis Phifer said the buying by SoftBank would have helped push up shares of tech companies in recent months, although the stocks were benefiting from other trends. "The flow is huge". It has also spent more buying derivatives in US stocks, the sources said.

One person familiar with SoftBank's trades said it was "gobbling up" options on a scale that was even making some people within the organisation nervous. "This can continue. The whale is still hungry". Options prices are determined by factors such as how far away the strike price is, the time to maturity and how volatile the markets are.

If the share price rises above the agreed level, the call option - the right to buy the stock - is beneficial.

"If SoftBank was selling puts its a very unsafe strategy". That is more than triple the rolling average between 2017 and 2019.

Equity options give investors the right to buy or sell stocks in the future where they are trading at a price higher or lower than what they are now trading.

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The options boom, partially driven by retail investors, leaves the USA market vulnerable to more volatility.

The size and aggressiveness of the mysterious call buyer, coupled with the summer trading lull, has been a big factor in the buoyant performance of many big tech names as well as the broader U.S. stock market, according to McElligott.

Buyers of options will have to pay less for the contract, but not more than the amount of money that can be earned or saved if the underlying shares move faster.

Investors with equity portfolios most ... "The equity volatility complex is acting "broken" and indicative that "something's gotta give", McElligott warned in a note shortly before the Nasdaq fell 5%.

How has choices market activity diverged from normal patterns?

A larger and longer-lasting stock market decline would be more damaging for this strategy, and would probably involve rapid declines, he added.

In August, SoftBank Chief Executive Masayoshi Son had announced a new investment management subsidiary that would park excess cash from a massive asset sale program in liquid stocks.

Investors are betting that tech stocks will rise further as the buying options that protect their holdings from those share buying prices have soared.

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