The Tech Melt Up, The Man Behind the Curtain, and Being Suckered

Shah Gilani|September 9, 2020

This is a true story.

It’s about U.S. mega-cap tech stocks and equity markets melting-up this summer and how one man drove the action, suckered in retail investors, and painted Wall Street’s biggest pros into a corner. It’s also a lesson for retail traders on how the big boys play and how to not get played by them.

Enter the Whale

In 1981, Masayoshi Son, or Masa Son as he’s known, started SoftBank Group Corp. (SFTBY) to invest in tech businesses. Over that time, he amassed huge stakes in Japanese and U.S. telecom companies, Chinese tech giants including Alibaba, and some of the world’s best-known Unicorns. And then, three years ago, SoftBank launched Vision Fund, a $100 billion tech incubator fund

Then, in early August, on an earnings conference call, he did it again. Masa Son announced SoftBank had launched an investment arm funded with $555 million (555 is slang in Japanese for “go, go go”). Akshay Naheta, who Masa Son had brought in to help run the Vision Fund and was now the head of the initiative, was on the move.

had already amassed billions of dollars’ worth of positions in public stocks, far exceeding the initial holdings that Masayoshi Son outlined on the call, because the setup was perfect.

Naheta saw how retail traders had bid up shares of Facebook, Apple, Amazon, Microsoft, and Google, and how those five stocks accounted for 25% of the value of the S&P 500. He saw retail’s interest in Adobe, and Netflix, and Zoom and other highflying stocks, and he bought them too.

He knew driving up the prices of certain stocks would drive stock indexes higher and draw in more retail buying and institutional buying, as mutual funds and investment managers had to chase rising markets higher or look like fools being left behind.

Going into the summer, when things are generally quieter, when trading volume thins out, when its easier to move stocks and markets, after amassing stock positions worth billions, Naheta had his troops buy call options on the highflying stocks everybody was talking about, the ones all the new-fangled retail traders were bidding up, the ones institutions then had to chase higher.

It’s been estimated the quasi-hedge fund bought at least $4 billion worth of call options, with a notional value of between $40 to $50 billion in underlying stocks.

The Melt Up

The brilliance of the trade wasn’t recognizing the setup: a lot of people saw and were playing the momentum game; buying huge amounts of call options was the genius move.

The real setup wasn’t getting retail buyers to buy more shares as they were going higher, though that was important for sure.

The real setup was inherent in the call options positions themselves. It was big Wall Street dealers like Goldman Sachs and Citadel who were being set up, and surprisingly fell right into Naheta’s hands.

When dealers sell huge volumes of calls they’re essentially shorting the underlying stocks. To hedge their risk, they buy shares of the underlying stocks. But they don’t buy shares on a one-to-one basis. They “delta hedge.”

Delta is one of the “Greeks” used to describe options dynamics; delta is how much options are expected to move for each dollar move in the underlying stock.

A delta of 1 means a dollar move in the underlying stock will move the option by a dollar. Since the call options SoftBank was buying were out of the money, their delta was less than 1. Maybe deltas were 0.2, or 0.3, or 0.4, which means to hedge the calls they sold, dealers didn’t have to buy shares on a one-for-one basis against the calls.

But there’s another Greek that matters, one that Naheta wanted to explode higher, gamma. Gamma is the rate of change of delta. In other words, delta isn’t fixed, it changes.

As the underlying stocks Naheta’s team bet on rose, their gammas rose, meaning delta’s rose closer and closer to 1, exposing the short dealers to increasing risk.

So, they did what Naheta knew they had to do, they bought more underlying shares to maintain delta neutral positions.

The genius is, as the dealers bought more underlying shares to hedge against the gamma melt-up they were faced with, their buying lifted stock prices, which increased gamma even more.

The feedback loop amounted to calls spiking higher amid a gamma squeeze, leading to more buying of the underlying stocks, leading to even higher call prices, to even more call squeezing, even more delta-hedging, and more buying of the underlying stocks, which quickly, because of the stocks involved, pushed market indexes higher and brought in more buyers, and so on until there is one massive market melt-up.

Not-So-Endless Summer

On Monday last week, Apple and Tesla started trading at their post-split prices, which brought in more buyers. Markets rose through Wednesday, with the S&P 500 and the Nasdaq Composite hitting new highs.

Thursday, all hell broke loose.

What happened, which the public and retail traders had no idea about, was SoftBank was taking profits on its calls. As they sold their calls, back to the dealers who wanted to cover their short positions, those dealers had to sell the underlying stocks they’d bought to delta hedge themselves.

It was an instant negative feedback loop as retail traders started selling too, causing all the highflying stocks that took the markets to new highs to selloff, which brought in short traders, which drove stocks lower, which forced dealers to sell more shares, and so on.

When it was over, only SoftBank and the dealers who had sold them their call options really knew what had happened.

Then on Friday, mid-morning, after markets opened down big-time, a Financial Times article announced, “SoftBank unmasked as ‘Nasdaq Whale’ that stoked tech rally.” Ironically, stupidly in fact, buyers came in and saved the day, buying stocks off their lows probably believing if SoftBank was a buyer of tech stocks, they must be going back up. They didn’t understand that SoftBank was selling calls.

What’s Next

Dealers aren’t done unwinding all their positions, though they sold a lot yesterday.

No one knows if SoftBank’s still sitting on huge stock positions, even though they supposedly sold most, if not all, of their calls. No one knows whether Naheta’s going to try and tank vulnerable stocks, make money shorting them, and buy them back in a lot lower, and start the gamma gears up all over again.

Retail traders are going to be the key this time around. Maybe they’ll buy this dip and arrest the selling. Or maybe they’ll panic and sell, or maybe even learn to short and really become terrors.

No one knows. We’re at a unique juncture right now.

My bet is we’re going to see some buying down here, because suddenly there are some great companies on sale.

How much lower we go before buyers swoop in is going to be about support levels for the FAANMG (FAANGs, including Microsoft) stocks.

You know where those levels are. encourage you to go back to those articles here and here and write them down and stick them to your computer monitor or in the notes on your phone.

And make sure you drop any questions you have in the comments below. I’ll be doing a major roundup, answering your questions about SoftBank, the FAANGs, the S&P 500, and whatever else you want to know. Just leave a comment below, and I’ll answer it on Friday!

Until then,

Shah