Is SoftBank a “whale” in US technology stocks?
Adding to the nervousness in the market on Friday was the Financial Times article SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally which implied that the Japanese investment company had engaged in large options bets on selected US technology companies as part of a new strategy of diversifying their assets across publicly-listed stocks and not only private companies. While the ‘whale’ issue and SoftBank’s history of big mistakes caused associations to Long-Term Capital Management, the nature of their options was not the cause behind the declines last week.
As the derivatives expert Benn Eifert outlines in this excellent Twitter thread even a large $50bn notional amount of SoftBank call options would not have caused much delta/gamma risk for market makers. Most of the trades were call spreads and estimated to have been options with longer duration (3-6 months) which means that the primary risk is vega (implied volatility risk). Eifert’s overall point is that last week’s move was what is called a “gamma squeeze” and that it was related to the crazy call option volume by US retail investors. As the chart below from SentimenTrader shows, there has been an explosion in nominal call option exposure from retail investors and the estimated premium spend over the past month has been around $40 billion dwarfing SoftBank’s bets by a wide margin.