U.S. options investors pull back on tech bets, but SoftBank's trade looms large

NEW YORK (Reuters) – As a tech-fueled sell-off hits Wall Street, investors are looking to options markets – including the positioning of Japan’s SoftBank Group Corp – to determine how much more volatility may be in store.

For now, few investors appear eager to buy the dip, which has sent the tech-heavy Nasdaq down 10% from its highs and rocked major U.S. stock indexes for three straight sessions.

Their recent caution is partially reflected in a measure called skew, which gauges demand for protective put options in relation to call options, used to bet on upside.

Amazon.com Inc’s 30-day skew, for instance, jumped to its highest level since July, according to data from Trade Alert. Skew for other tech-related companies, including Salesforce.com Inc, Adobe Inc and Facebook Inc, also rose sharply.

“It is possible that this ‘buy-winners-at-any-price’ narrative may be weakening,” said Drew Dickson, founder of Albert Bridge Capital.

For a graphic on Skew plunges, then leaps Skew plunges, then leaps:

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That contrasts with the last several weeks, when institutional buying – a substantial part of it from SoftBank – picked up in call options on those companies, exacerbating a rally that drove markets to record highs in August.

“Heavy call option ownership helps exacerbate the run up … and also means you have a bigger air pocket whenever you get more extended,” said Troy Gayeski, co-chief investment officer of SkyBridge, an alternative investments firm. “It is a symptom of the broader situation.”

Several call spreads attributed to SoftBank have expirations in October and November, while others extend into 2021.

Those institutional trades coalesced with earlier call buying in popular tech-related companies from retail investors.

The rush of purchases drove down the average put-call slope – a variant of skew – among components on the Nasdaq 100 to near its lowest level in 13 years, according to data from options analytics firm ORATS.

For a graphic on Rare exuberance Rare exuberance:

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The robust options activity likely amplified moves in tech-related names, which have been dubbed “stay-at-home” winners in the wake of the coronavirus pandemic.

“Arguably you could say retail was actually first and then (SoftBank Chief Executive) Masa Son jumped on it later, and that could possibly have been the straw that broke the camel’s back,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.

Though SoftBank’s call buying is not the only factor in the market’s run-up and subsequent sell-off, it likely exacerbated both, analysts said.

Selling calls can leave dealers exposed to heavy losses when the underlying stock rises significantly and the option’s price jumps by increasing amounts along with it. To allay that, dealers buy the underlying stocks to hedge their exposure. That hedging activity can thus exacerbate both upside moves, as they buy more shares to offset their call sales, and downward slides, as they sell those shares once prices fall.

Despite the sell-off in U.S. stocks, that exposure has not gone away. On paper, SoftBank’s options purchases amassed a $4 billion profit last week, the Financial Times reported here on Sunday. SoftBank declined to comment.

Those positions remain open, strategists say. A couple of positions, such as November call spreads in Salesforce and Facebook, appear to have been rolled to higher strike prices in anticipation of further gains in those stocks.

Much of the volatility may have been induced by retail trading in options with near-term expiration dates, said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group. But a subsequent climb in tech shares could bring about turbulence in later months should SoftBank’s positions remain in play.

“As we get closer to the expiration of these positions, if they end up in the money, they’re going to have a much bigger impact,” Murphy said.

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