Stock Market Comment: SoftBank and US tech sell-off

• Japanese SoftBank made big bets on US tech

• $50 billion exposure through derivatives

• Hedging purchases behind recent US tech rally?

• Risk of funds teaming up against SoftBank

• Tesla, Microsoft, Amazon and Netflix among stocks involved

SoftBank, the Japanese investment holding company, has attracted a lot of attention lately due to its massive bets on US technology stocks via derivatives, namely options. The story has been credited as one of triggers of recent tech sell-off and in our Stock Market Commentary we will explain what's it all about and why it matters.

SoftBank bets big on US tech

SoftBank disclosed in regulatory filling at the end of June that it has made a $4 billion investment in US Big Tech. However, Financial Times and Wall Street Journal later reported that SoftBank also made a significant bet on the US tech via call options. A $4 billion investment into calls is said to have given the company a $50 billion exposure to individual tech companies. Simultaneously, SoftBank sold calls with higher strike prices allowing it to lock profits should the market continue to rise.

US100 broke below the lower limit of the upward channel last week and launched a steep correction. US tech index tried to recover today but began to struggle after reaching the resistance zone at 11,250 pts. Should upward move resume after Wall Street opens today, upper limit of Overbalance structure at 11,385 pts will be on watch. Source: xStation5

Tech optimism or hedging craze?

Massive options buying by SoftBank has inflated trading volumes on the options market. An increase in trading volumes on US tech options could have misled investors into thinking that there is a widespread belief that Wall Street indices will continue to march higher. Moreover, writers of call options sold to SoftBank had to hedge their exposure and the best way to do it is by buying underlying shares. Situation created an additional demand for US equities and subsequent price gains of the US tech inflated call option prices. At the time the story saw daylight, SoftBank was reportedly sitting on a $4 billion profit on its options bet.

Stock split, sales by executives and "at the market" stock offering all hint that tipping point on Tesla (TSLA.US) may have been reached. Shares of the US EV manufacturer made a massive 21% drop yesterday and finished just slightly above the support zone ranging between $330 handle and 78.6% retracement of an upward impulse started on August 12. Source: xStation5

Funds may team up against SoftBank

Why does it matter? It was believed that retail investors are the reason behind the surge in option and stock trading volumes. Of course, they also played a part but it looks like it all started with SoftBank's derivatives bets and subsequent purchases of US tech shares for hedging purposes. As it was revealed who exactly was behind those big trades, there was a high risk that institutional investors could team up against SoftBank. Should the market go the wrong way, SoftBank would have to rush out of the market and unwinding of such a massive trade would depress the value of assets involved (and benefit funds that played against SoftBank).

Amazon (AMZN.US) has pulled back around 11% from its recent peak. Shares price of the US e-commerce giant dropped into its previous $3,100-3,250 trading range. However, a sequence of higher highs can be spotted on the H1 interval hinting that selling pressure may be easing. Breaking above the upper limit of the range that is additionally marked by the 200-hour moving average (purple line) could be seen as a bullish sign. Source: xStation5

Stocks involved

Among companies that SoftBank decided to bet on, one can find some big US tech names like Tesla (TSLA.US), Microsoft (MSFT.US), Amazon (AMZN.US) or Netflix (NFLX.US). All of these stocks encountered heavy losses during the past few sessions, what could have hinted that some market participants are in fact betting against SoftBank. While in some cases there were company-specific reasons behind the drop as well (i.e Tesla not included into S&P 500), a broad pullback on the stock market, especially techs, has given the story some credibility. SoftBank does not disclose information on its trades outside of regulatory filings therefore we are yet to find out whether it is all true or not but what matters for now is that the market seems to believe it.

Similarly to Amazon, share price of Microsoft (MSFT.US) retraced towards a lower limit of its July-August trading range ($203.50). Stock finished yesterday's trading near daily lows creating a slight bearish bias. However, Microsoft gains in premarket trade today and futures moves could depend on whether it manages to break back above $215 (upper limit of trading range). Source: xStation5