SoftBanks's Role in the Tech Run-Up and Sell-Off

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Tech stocks ran up furiously for most of the summer and then went into correction territory in the first week of September. And SoftBank -- a global tech investment conglomerate -- played a role in all this.

But let’s back up, and look at why tech surged in the first place. First off, investors often favor growth tech when economic uncertainty hits. Second, the pandemic forced people to stay at home and adopt at a faster rate services like streaming, e-commerce, cloud and new-age software products.

Then, valuations expanded to sky-high levels into the sell-off.

So who was responsible for all of that demand for tech shares? Much of it stemmed from the $110 billion by market cap SoftBank, a global technology holding company at the forefront of new tech advancements.

News reports show that SoftBank was buying tens of billions of dollars worth of long positions in large cap U.S. tech stocks. Apple AAPL and Tesla TSLA, two of the biggest bubble-like stocks in the run-up, rose to valuations that many agreed looked incredibly stretched compared to earnings estimates for the next few years.

SoftBank was initially buying the shares, but then began buying call options, a way to take a long position without putting up capital immediately at current prices. A call option contract says the buyer of the contract can buy a stock at a specified price for a specified period of time, so if the stock rises, the call owner can buy at the lower agreed upon price and immediately sell at the higher market price. Softbank had bought more than $30 billion of calls in a short period. That’s larger than the assets under management of many well-known and prominent hedge funds.

But dealers, like investment banks, selling calls to SoftBank, were running short on calls. They had to hedge the shortcoming on those long positions by simply buying the shares of the underlying companies.

You can see how there was so much demand for these stocks.

And when this all stopped, all that was left were the sellers of the big tech names, which were clearly overstretched.

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