David Shapiro on Softbank’s bull squeeze in US tech stock market

It was recently revealed that Japanese-based SoftBank was behind the “Nasdaq whale” – buying billions of dollars in technology company stock options in the past month. According to the Wall Street Journal, SoftBank bought $4bn in options on stocks such as Amazon, Apple, Alphabet, Facebook and Tesla – driving up volumes and contributing to a trading frenzy. In this excerpt from the Rational Radio webinar, BizNews founder Alec Hogg delves deeper into Nasdaq’s SoftBank-related drop with market commentator David Shapiro. – Claire Badenhorst 

David, the big story on the investment markets of the past week has been Softbank punting Nasdaq shares. Pushing them up to astronomical levels. Let’s start with Mr Son and Softbank and the hundred billion dollar fund, which he then has created a equity fund which has been punting on Nasdaq by buying, well, options on some of those single stock futures in a way, I suppose – we know it very well in South Africa – and pushed those share prices way too high. And we’ve seen a little bit of a retraction in some of them. We’ve been talking on this show, Dave, you and I, for a while about why have the share prices gone up so strongly and I guess now we have a reason.

There was a suspicion that there was option trading; not a suspicion – the evidence was there in the number of options that were being written. Alec, it’s massive, and for option traders, these kind of numbers were quite scary. Now, an option is nothing more than an option. You know, it’s an option to buy something – a share – at a certain price somewhere down the line. For example, it might be a three month option, a six month option or even a year option. So, if you want to buy a share, you can go to an options trader and they will issue you that option and charge you a premium.

Now, of course, what happens is if that share price starts to rise, first of all, when you write an option, you have to take some protection because there’s a good chance that that option price could be reached, in which case the person will exercise the option against you and you have to sell that person the shares or give that person the shares. So, you take out insurance along the way but as those shares start to rise so you have to take more insurance. But what’s happening is that the insurance you’re buying keeps going up and you’re pushing the share price up as well, and then you start to panic and start to buy more options.

So, the massive amount of options that were bought, which we now assume or attribute now to Softbank, have caused absolute chaos in the market and have caused almost the equivalent of a squeeze.

Not a bear squeeze; this is a bull squeeze where the option writers have had to take a huge amount of protection and buy massive amounts of shares in order to protect themselves in case those options are exercised. So, that’s simply what’s led to this.

Of course, when share prices start to fall, for whatever reason – they might have reached that excess level – then you get the opposite happening where you now start to unwind your insurance, which can accelerate on itself and cause kind of big drops.

So, that’s what we’re faced with and it gives explanation to why we’ve seen these massive price increases. Way, way above, perhaps even some of the good earnings numbers that we’ve seen. So, where does this settle? We don’t know. We’re two days into it. We’ll see whether or not this is working its way out the system and whether there’s further downside in the Nasdaq, meaning, in those tech shares.

Read also: Rollicking tech stocks trouble traders – Wall Street Journal

David, when you have a look at the graph we have on the screen right now, it’s quite illustrative. Although Nasdaq, which is where much of the action went on, has done very well since the Covid-19 pandemic hit, the reversion in the last couple of days has been pretty small, relatively speaking. It just takes us back in the run up to, where we are now, we’re at 11 313. So, the run up is where we were on the 21st of August. So, we haven’t really lost that much. Is the worst to come?

There might be. We don’t know. Alec, this is a mystery. We don’t know the dynamics of these derivative markets. We don’t know exposure. Mr Son can come in and start buying more calls. We don’t know what his strategy is.

He’s come under severe criticism for what he’s doing but this may be the asset management company that he wanted to build and this might be his strategy. So, no one’s quite sure of what the ultimate aim of Mr Son is but his shares are down about 7% in Hong Kong today, showing the displeasure of his shareholders at what he’s doing, which is obviously an incredibly aggressive strategy, whatever it is. But he’s an outlier. He’s a strange man. He does these very, very odd things. But the market’s telling you they’re not happy with the news that they are reading.

Well let’s have a look at that share price – the Softbank share price, Dave. As you say in Tokyo this morning it was under a bit of pressure. I’ll just call it up on the screen now. There we go. That is quite a dip. And this is going back for one year. If we have a look, maybe in the past three months, perhaps even one month will give you a better view. There we go.

So, in the past month, the SoftBank share price has dropped in yen. It’s certainly year-to-date still above where it started – ¥4,500 – and it’s now just under ¥6,000. So, Softbank’s still done OK, but as you see in that last little dip there, shareholders in this company are getting a little concerned at the impact, because I guess, as you’ve explained, that if you get an unwinding of these forward or bullish options, and the puts start coming into play, then it has the opposite effect that we’ve seen so far of pushing up the market. This could be melting down the market.

It could work that way. So far, according to the Financial Times, he’s made about $4bn on his deals but that depends. These are unrealised gains so it depends whether he can realise them. But if people suspect that the market’s going down, it could unwind a lot faster than that and that $4bn can go down to $3bn, too, very easily. So, I think that’s what they’re nervous of. He’s a very strange man. It’s an odd company. I used to like it because it was almost an Asian Silicon Valley.


Yes, but lately things have gone all wrong. It started with WeWork. It started with a whole lot of other issues as well. So, I’d prefer to switch from Softbank into what is his biggest underlying company – Alibaba. I’d rather go for direct exposure to Alibaba, simply because you don’t know what he’s going to pull out the hat next.

Just as a little update on that. Softbank is in the process of selling the stake in Alibaba and selling a number of the other stakes – basically liquidating about $50bn. These guys don’t play small numbers do they, Dave? He’s got a Vision Fund of a $100bn to play with, of which over 50 is sitting in cash. So, if he wants to single handedly drive up Nasdaq and benefit from it… He’s also put his own money in. He’s guaranteed that if, in 10 years time, the fund that he’s created for the equity investing, if that does not show a profit, he will make the difference, make up the difference. So, as you say, a very interesting person. What do you do now if you own Amazon, Apple, Tesla, etc. where Mr Son has been playing and punting big?

Read also: David Shapiro on Barrick, Buffett’s new pick – and Alec Hogg’s. Plus other market-moving stocks

I think bite your bottom lip. They’re still good businesses and that’s the issue. I’ve been in them for a long time and I’ve always liked them and I like where they’re going. We’ve made some money and we’re going to lose a bit of money, but I don’t want to lose my position in those shares. I still think that once we get out you find that we don’t come back in, and that’s my big worry.

“I don’t know where this is going to go and I hope that we see one more sell-off day and that’s it. It just works its way out of the system.”

You know what’s very interesting? Generally you can hedge yourself by buying puts. In other words, the right to sell the share. Not the right to buy shares. The right to sell it to somebody else. The problem is that a lot of these traders have not been able to do that because in March, all the put writers were put out of business when the market cracked 30%. So, they’re still licking their wounds. So, you know, that’s the opposite market. So, if you wanted to find a put, you know, like in the situation where you feel the market’s very high and you say, can I find anybody who’s going to write me a put, in other words, give me a chance to hedge myself – no one’s there. They’ve all gone battered and bruised and taken out by March.

And short sellers. Short sellers have also been carried out. In fact, the guy who starred in The Big Short – Michael Lewis’s book that was a great movie – Steve Eisman, he was a very famous short seller of Tesla. He was short selling Tesla at $300. I wonder if he’s been taken out or if he was smart enough to get out.

Elon Musk, who has been angry with the shorts for a long time, about a month ago, as the Tesla share price was going up, tweeted that the price is now a little too expensive even for him. His own views and he’s the super optimist. So, what does he do? He does the logical thing, which any rational person does, and he sells $5bn of new shares at this ridiculously overvalued price.

That’s a brilliant move. You want to be stupid? You want to pay this? Well, fine. Let me use the money. I can use it. You know, Donny Gordon was famous for that. Every time the share price was overpriced he had a rights issue and he got cheap institutional money. I mean, for him, it was very cheap. DisChem did it at about R37 or R38. They’re half the price now. You want to be silly? You want to pay up? The institutional chaps couldn’t get enough.

Incredible. Well I have my own story about that. In 1999 when I listed Moneyweb, there weren’t enough shares to place, David, at R1. And a year later after the market had cracked, Old Mutual were giving me their shares back at 17 cents. Extraordinary. You just sometimes think, come on, can anyone be that dumb? But anyway, it is what it is and that’s the market. So, Donald Gordon, as you said before, had the biggest ever rights issue in the UK just before the 1987 crash. Elon Musk might have had the biggest rights issue or one of the biggest rights issues in the US in the placement of shares just before Nasdaq takes another knock. Not the Nasdaq, hopefully, but certainly his own shares. Thank you, David. Another fascinating programme. 

  • The full Rational Radio webinar, which includes guests Phil Craig, Irnest Kaplan and Sean Peche, can be found here.  
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