SoftBank option purchases raise eyebrows as Wall Street backtracks

(Reuters) – SoftBank Group Corp (9984.T) made significant option purchases during the run-up in the U.S. stock market in recent weeks as a way of temporarily investing some of its proceeds from asset sales, people familiar with the matter said on Friday.

The trades were revealed just as Wall Street’s runaway technology-led rally was faltering. The derivatives purchases could shed light on the Nasdaq .IXIC and S&P 500 .SPX rise just two days ago to record highs, which seemed to put the coronavirus sell-off in the rearview mirror.

But market players were unable to gauge the extent to which Softbank’s derivative purchases contributed to recent gains. Nor was there strong evidence that the end of the buying could have triggered the stocks tumble on Thursday and Friday.

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 benefitting from other trends. The extra demand from SoftBank “would have created a positive feedback loop,” he said.

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.

So far, SoftBank has spent roughly $10 billion buying shares. It has also spent more buying derivatives in U.S. stocks, the sources said. The Financial Times first reported on these derivative purchases on Friday.

A SoftBank spokeswoman declined to comment.

Reuters could not immediately determine what options strategy, or combination of put options and call options, SoftBank used. Hedging around the purchase and sale of options can magnify moves in the underlying market.

The main indexes on Friday were recoiling from the all-time highs hit midweek. The Nasdaq was on track for its worst two-day fall since March as investors dumped heavyweight technology stocks, while concerns around a patchy economic recovery also hit the S&P 500 and the blue-chip Dow.

“If SoftBank was selling puts its a very dangerous strategy. The big questions are – the scale of what they were doing and are they selling puts to buy calls – because that’s when you get embedded leverage,” said Michael Purves, founder and CEO of Tallbacken Capital.

SoftBank has already built a stake worth around $1.2 billion in e-commerce giant Amazon.com Inc (AMZN.O), according to regulatory filings.

For a graphic on SoftBank U.S. Top 10 Holdings:

here

In addition to Amazon, the Japanese tech conglomerate has built stakes in Netflix Inc (NFLX.O), Tesla Inc (TSLA.O), Microsoft Corp (MSFT.O) and Alphabet Inc (GOOGL.O), according to the filings.

In total, SoftBank has injected roughly $4 billion building up these stakes.