SoftBank is sitting on trading gains of about $4bn after founder Masayoshi Son drove aggressive bets on equity derivatives that helped propel the US stock market to record highs, said people with direct knowledge of the matter.

The high-risk strategy has been built up over the past few months, these people said, with the Japanese conglomerate spending about $4bn on options premiums focused on tech stocks over that time.

Aside from a sharp pullback in equity markets at the end of last week, the huge derivatives bet on selected US stocks has worked, leaving SoftBank with large but as yet unrealised profits. However, a continued fall in the US stock market could eat away at SoftBank’s returns.

SoftBank’s bets have been made at the instruction of Mr Son, who once lost $70bn in the dotcom crash.

The strategy has focused on options related to individual US tech stocks. In total, it has taken on notional exposure of about $30bn using call options — bets on rising stock prices that provide the right to buy stocks at a preset price on future dates. Some of this position has been offset by other contracts bought as hedges.

The trades have been deeply controversial even within SoftBank, according to people close to the discussions. Critics of the strategy say the group is better off seeking returns from complicated structured investments such as the one orchestrated in Wirecard last year, which shielded against losses even when the German company collapsed. 

“It’s just a levered punt on the market,” said one person with direct knowledge of the trades. “The whole strategy is just momentum buying.”

READ ALSO  YouTube reverts to human moderators in fight against misinformation

SoftBank declined to comment.

Stock markets have sailed higher since SoftBank started buying these options, thanks to rock-bottom interest rates and in part also to a growing retail investment boom, particularly in tech stocks such as Tesla.

The strategy focus on individual US stocks has meant a smaller market than options linked to broader stock indices. The overall nominal value of calls traded on individual US stocks has reached a record high in the past two weeks, averaging $335bn a day, according to Goldman Sachs, more than triple the rolling average between 2017 and 2019.

Single stock call option volume has been rising rapidly

The investments are the latest twist in a strategy reversal by Mr Son since March, when global markets cratered due to the impact of the coronavirus pandemic. SoftBank’s shares crashed at the time, putting the company and Mr Son, who has borrowed huge amounts against his shares in the company, under severe distress.

Since then, SoftBank has shifted to unwind huge portions of its portfolio, selling stakes in Chinese ecommerce group Alibaba, T-Mobile US and its Japanese telecoms business. The cash raised from those proceeds has been marked for share repurchases and to pay down its hefty debt load.

The disposals have helped lift SoftBank shares to a 20-year high. But the cash raised has also been used to begin a new strategy of betting on publicly listed technology stocks, marking a break from Mr Son’s previous focus of betting on private companies through the Vision Fund.

Additional reporting by Leo Lewis

Via Financial Times