Big Fish

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What's going on?

You’re gonna need a bigger boat: while Japanese tech giant SoftBank reportedly acted as a “whale” sending US tech stocks surging last month, a shoal of smaller investors may have made even more of a splash (tweet this).

What does this mean?

SoftBank’s snapped up billions of dollars’ worth of call options on major tech stocks recently. These gave it the right to buy the shares a few months hence at predetermined prices – which will hopefully turn out to be lower than their market value by then. But the combined efforts of retail investors were likely a much bigger influence on Big Tech’s dramatic rise in August.

These small fry bought call options set to expire in a matter of weeks rather than months, forcing the “market makers” taking the other side of the bet to hedge their exposure. Those selling call options on, say, Apple shares risked handing the stock over at a large loss if retail investors’ options came good. Rather than taking that risk, the market makers bought up Apple shares immediately after selling the call options – pushing their price up and in turn making those very same short-term options more valuable.

Why should I care?

The bigger picture: More than meets the eye.

Given its notoriety, SoftBank has naturally attracted attention for its tech stock option-buying. But their longer time frame suggests these options would’ve benefited more from an increase in the underlying shares’ implied volatility than from rapid price rises alone – something which has a greater impact on the value of shorter-term options.

For markets: Can’t abide a Jonah.

SoftBank was reportedly on track to pocket $4 billion worth of profit from all this derivative trading. But its own shares were instead forced to swallow a 7% hit on Monday: last week’s tech selloff may actually end up denting SoftBank’s profit this quarter.

Originally posted as part of the Finimize daily email.

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