So you go to someone else, who has that kind of money & someone who is willing to take a bet based on his/her market perspectives that that stock will not go beyond even Rs. 90 in the near future. You propose to that person, that you will pay him/her a small token amount, say Rs. 10 per share for 10,000 shares, which comes to Rs. 1,00,000; which is still better than Rs. 8 lakhs, of course! In return for this generous sum, this person commits to selling you the 10,000 shares of this company at Rs. 90 whenever you make a request during the next 6 months.
If the prices reach Rs. 120 anytime during the next 6 months, you just call option and buy the shares from your friend at Rs. 90 and sell them off immediately at Rs. 120 making a sweet Rs. 30 per share, which comes to Rs. 3,00,000! And that too, by just paying Rs. 1,00,000!
If the stock prices tank instead of rising, you just don’t exercise your right to call option. You walk away with just the loss of your token amount instead of shelling out Rs. 8,00,000 in the first place and running losses on those shares. And this agreement is called a call option!
So where does SoftBank feature in all this?
Market Whales are essentially Market Manipulators; they will come into a market, buy a majority of the available positions & drive up the price. SoftBank paid roughly $4 bn in premiums to own the option of buying (or selling) $50 bn worth of tech stocks like Apple, Amazon, Zoom & Tesla in NASDAQ. The markets are always responsive & so by doing this, SoftBank being a major investor, drove up the prices of the stock.
In a consequent market frenzy, the other market makers also started buying stocks of other tech companies in order to hedge their bets & regular stock buyers saw a golden goose in tech companies & did the same. This explains how the stocks of a giant company like Zoom go up 40% in just 1 day.
So basically, SoftBank bought call options of certain companies, manipulated market prices of their shares and then exercised their call options and made a fortune. All while still playing by the rules! Most people had no idea who the NASDAQ Whale was. As a result of all this, Softbank showed profits of $4 bn in just 2 months on an initial investment of $4 bn! And this is the saga of the NASDAQ Whale.
Interested in learning more about Futures & Options? Introducing Prashant Mohanraj, Platform Partner at Alpha Alternatives & an IIM-A alumnus, who has years of F&O experience in trading in India, UK & Singapore. Prior to this, he has been ex-SVP at Quant Capital & ex-VP at Edelweiss & Kotak Securities.
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