-Softbank has been piling billions of dollars into options trades, which is likely influencing the melt-up in tech stocks
-Banks are being forced to buy shares on their end as well
-The fear gauge and stock market are acting unconventionally
Hi there—here is this week's update!
Softbank has been uncovered to be the 'Nasdaq Whale' that has bought billions of dollars worth of US equity options.
The scale in which they are buying up these call options is monumental and is likely driving up many large stocks' prices.
There are a few important things to consider with this news.
Banks are being forced to buy shares
This buyer's size and aggressiveness has caused banks and brokerages on the other side of the trade to purchase shares of the stocks.
Typically, when banks and brokerages arrange investors' options, they are then left with their own exposure to the markets. To zero that exposure out, options dealers buy derivatives and stocks.
With call options, this can give stocks a more significant boost. As shares surge, they need to hedge more, adding fuel to the fire.
The stock market and fear gauge rose in unison
We saw an interesting dynamic, with the stock market and the Vix index (the fear gauge of Wall St.) rising together. Typically, they have an inverse relationship.
Softbank may be the big player, but others are piling into options trades
Softbank may be the whale, but there are still plenty of fish jumping into the options market. There is an incredibly high value of call options on single stocks. If you look at the chart below, this is more than triple the rolling average between 2018 and 2019.
What this means
We've spoken about how Big Tech and risk assets have had an incredible melt-up recently.
The definition of a melt-up is a dramatic and unexpected improvement in the investment performance of an asset class, driven partly by a stampede of investors who don't want to miss out on its rise, rather than by fundamental improvements in the economy. Melt ups often precede meltdowns.
Typically, we would see the fixed-income markets flashing red, but surprisingly this isn't the case right now. We're continuing to see the decoupling of the fixed-income and equity markets, but for how long—we're not sure.
While we're still risk-off, we think this has presented an exciting opportunity, and we have added a new investment to Round portfolios. We are slowly legging into this new fund, and we'll provide a deeper dive next week for those of you that are invested!
We hope you have a safe, fun, and relaxing holiday weekend!
See you next week,
-Saul & The Round Team
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