# How to play the"market meltup"?



## jargey3000 (Jan 25, 2011)

I'm betting this US "market meltup" has a way to run, before it eventually implodes. (and the cdn. market will 
toddle along behind)., What's the best way to play it on its run-up, on the US, and Cdn. sides? ETFs? Individual stocks? Which ones? Suggestions?


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## Rusty O'Toole (Feb 1, 2012)

For a short term play you get more bang for your buck with options. If you don't have a particular stock in mind buy one of the indexes like the S&P, Dow or NASDAQ. They all have representative ETFs and options.

Best buy is a call option with around 70 delta.3 to 6 months out. You can buy a Feb 16 18 247 call option in the SPY with 116 days to run, for $1315. It has about $1000 intrinsic value, the rest is time value. 

If the S&P runs up to 2770 by February it will be worth $3000. On the other hand if it drops below 2470 the option will expire worthless. So, it is like a lottery ticket. Best to roll or sell about a month before expiry.

There are other possibilities in other ETFs and time periods, that is just an example.


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## Pluto (Sep 12, 2013)

as far as stocks go "play" it with BABA.


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## jargey3000 (Jan 25, 2011)

Pluto said:


> as far as stocks go "play" it with BABA.


JFFR(justforfuturereference) BABA currently sits @$174.30 (down $3 today)
hmmmmm.....might pick up 1,000 shares or so.....


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## Pluto (Sep 12, 2013)

Yes. Buy it when it is near the 50 MA as it is now.


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## Pluto (Sep 12, 2013)

BTW. baba is a better one to trade ( compared to FTS).


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## lonewolf :) (Sep 13, 2016)

Jargey I bought lotto ticket 1 SPX Dec 2018 3500 call for .80 

Call will probably expire worthless though if get melt up payout will be good.

Options are cheap right now if get melt up or crash positioned for. Holding OTM puts as well. No melt up or crash options will most likely be worthless.


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## peterk (May 16, 2010)

Rusty O'Toole said:


> Best buy is a call option with around 70 delta.3 to 6 months out.


Why is a delta of 70 the "best buy", in your opinion?


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## My Own Advisor (Sep 24, 2012)

The best way to play it, I think, is via indexing. On the way down, not sure. Things will change/correct/implode eventually. Just don't know when. Whatta bull run.


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## james4beach (Nov 15, 2012)

What a great 2017 bubble thread! I remember discussions like this before in 2006 and 2007 back at Yahoo forums. I wouldn't pick individual stocks, since even the institutions these days play these themes using broader vehicles. Here are some ideas, NONE of which I'm doing. Personally I think some of these are only good ideas if they fit within your geographically diversified asset allocation and only in small doses.


 ASHR: join the China rally. 22% one year return.
 EEM: join the emerging markets rally, overlaps with China. 25% one year return.
 SSO: leveraged S&P 500 index, not a bad vehicle actually. 47% one year return.
 XIV/SVXY: bet on declining volatility. 186% one year return.

I think all of these will benefit from a market melt-up. Personally I think the S&P 500 index is ground zero for the equity mania, so if I wanted to play a melt-up, I'd probably use SSO or XIV (which are 1st and 2nd order derivatives of the S&P 500). The 5 year annualized return of SSO is 28%, and for XIV it's 46%. *Annually!*

WARNING: my guess is that those derivatives will crash 70% to 95% once volatility returns and the US market falls.

So if you want to get crazy, you can definitely go this route. For the record, I have 25% exposure to stocks and far more money in cash & fixed income.


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## Rusty O'Toole (Feb 1, 2012)

peterk said:


> Why is a delta of 70 the "best buy", in your opinion?


Bang for the buck. It has $1000 worth of intrinsic value and $315 of time value. And 70 delta means it moves about 70% as much as the underlying. If the underlying moves up or down, the intrinsic value changes dollar for dollar but the time value doesn't. If the SPY drops you will lose less than if you owned the SPY. You will also gain less but only paid a small fraction as much for the privilege.

Far OTM options like Lonewolf buys are a pure sucker bet. There is not one chance in a hundred they will pay off. Actual probability of expiring worthless, 99.93%. Probability of mine expiring worthless, 34.76%.

So why buy them? Because for $12.50 a share (they went down) you can "own" a $256 security and get nearly the same dollars of profit as if you owned it outright. That is what I mean by bang for the buck.

It also means your max loss is $12.50 a share, same as if SPY dropped to $243.50 but no more than that.

Out of the money options are cheaper but have less chance of going in the money.

To put it another way. The best option would be the at the money option. Stock goes up, boom you make money. The problem is, this is the most expensive option in terms of time premium. By buying an ITM option you get a larger percentage return. You can also buy OTM options but they are much less likely to pay off.

I like buying option spreads. They are cheaper to buy and reduce risk of loss but also cap your gains. Unless you know about rolling but that is getting into more strategy.

I should emphasize once again THESE ARE LOTTERY TICKETS. Not a conservative investment. Personally I think it is crazy to start betting on a rally that has been going on for a year and just set a record as the longest without a 3% drop. If anything we are due for a drop more than a further run up. But if you insist, buying an option is a cheap way to bet.


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## Rusty O'Toole (Feb 1, 2012)

Further to the above. Any option is a compromise between low price and chance of ending up in the money. If you buy very cheap options the chance of making anything at all, is small. The more expensive the option the more chance you have. The 70 delta rule is a popular rule of thumb among option pros. They consider it a good compromise between cost and value. That is all. You could just as easily take a flyer on an out of the money option if you think there is a small chance the thing will take off like a rocket.


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## peterk (May 16, 2010)

Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week. 
So is the inverse rule of thumb that options _sellers_ generally want to avoid selling ~70 delta options?


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## Jimmy (May 19, 2017)

Maybe wait until they raise interest rates a few more x to to get more reasonable US valuations. There may be another raise in the US in 2017 and if not definitely in 2018 which should cool growth and valuations to more normal levels. The federal funds rate is still only 1.25%. The rate forecasts are 2.5% for 2018. If they hiked interest rates 1.25 % tomorrow markets would correct ~ 10 % from that alone.

For now low vol more fairly valued EAFE ETFs and some assets that benefit from interest rate hikes.


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## Rusty O'Toole (Feb 1, 2012)

peterk said:


> Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
> So is the inverse rule of thumb that options _sellers_ generally want to avoid selling ~70 delta options?


Professional option sellers couldn't care less. They will sell you anything you want, provided they get more for it than it is worth. This is the bid/ask spread. They will buy or sell puts, or calls, ITM or OTM all day long. At the end of the day they will figure out their position and if it is too heavy to the long side, hedge by buying stock or SPX options, or vice versa. Their object is to collect more premium than they pay out and hedge any risk. I am talking about market makers with millions or billions to invest.

I sell calls against my stock positions for the extra profit. I prefer to sell out of the money calls with 85% chance of expiring worthless. This allows me to make a little money with minimal risk of losing my position. If the option gets hit I will roll it out in time and to a higher strike.


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## Eder (Feb 16, 2011)

Play it the same way as always...buy more RY, BCE , FTS, TRP and CNR....oh, and get some sleep!


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## Rusty O'Toole (Feb 1, 2012)

peterk said:


> Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
> So is the inverse rule of thumb that options _sellers_ generally want to avoid selling ~70 delta options?


The $1314 gamble I talked of is an in the money option. When I wrote, the 247 call had $10 of intrinsic value and $3.14 of time value. A drop of $10 in the SPY or $100 in the SPX could wipe out the intrinsic value but it would still have some time value.


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## peterk (May 16, 2010)

Yes I followed you. Sorry I meant I'd rather risk much less than $1300 on a OTM gamble call _instead_, or a deeper ITM call that was more expensive and safer.

I think, anyways.


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## My Own Advisor (Sep 24, 2012)

Eder said:


> Play it the same way as always...buy more RY, BCE , FTS, TRP and CNR....oh, and get some sleep!


Own them all!!


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## lonewolf :) (Sep 13, 2016)

Premium is inexpensive now. When premium is inexpensive going into the money & paying intrinsic value to reduce premium cost is less important.

In March of 09 was buying deep in the money calls to reduce premium costs, as options were expensive


Playing possible large moves up or down if market goes against me in large way & sitting with options with a lot of intrinsic value there is a high risk to losing intrinsic value.

The market moves down faster then up & if looking to play possible crash will play long OTM puts

The market moves up slower then it does down to play upside will play long ITM calls for stock indexs

The 1 far OTM call on SPX was a play on a possible phase transition such as DJI made into 1929 top, Nikii Dec 1989 top & gold into the 1981 top. A phase transition does not happen very often & the odds of buying OTM calls to catch one the odds are against which is why payout will be high.


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## lonewolf :) (Sep 13, 2016)

I probably screwed this one up if the world starts buying the US market the DJI could out perform SPX


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## lonewolf :) (Sep 13, 2016)

Very dangerous game do not want to over stay welcome if we get phase transition. The Nikki is something like 40% below 1989 phase transition top. Time to exit buy & hold need hedging to protect


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## Pluto (Sep 12, 2013)

https://www.cnbc.com/2017/11/01/mar...onday-level-potential-significant-danger.html

Optimisim reaches pre '87 crash level. 

to me this is not a sell signal, but it makes me watch the market action closely.


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## james4beach (Nov 15, 2012)

james4beach said:


> ASHR: join the China rally. 22% one year return.
> EEM: join the emerging markets rally, overlaps with China. 25% one year return.
> SSO: leveraged S&P 500 index, not a bad vehicle actually. 47% one year return.
> XIV/SVXY: bet on declining volatility. 186% one year return.
> ...


Just for fun - _purely for entertainment_ - checking on these melt-up trades since this post,

ASHR +3.1%
EEM +2.1%
SSO +2.0%
XIV +4.1%

All are doing better than the S&P 500 and TSX index. Party on!


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## james4beach (Nov 15, 2012)

Wow, Bloomberg has created a "Bubblicious" portfolio to play the melt-up. It's similar to what I suggested above: exposure to China and short volatility (XIV). So now we know that _everyone_ is doing the same thing.

https://www.bloomberg.com/news/arti...-can-either-buy-bubbles-or-be-left-far-behind


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## james4beach (Nov 15, 2012)

What on earth is happening with Chinese stocks in the last few days?

The Shanghai Composite was up nearly 6% on Monday, several big up days in a row. ASHR (tracking the Chinese A-shares market) was up 11% on Monday. That's up 16% in three days.

Scanning some headlines, it seems that Chinese state media is encouraging stock buying, but I have trouble believing that this is all it takes to cause this kind of movement. Could this become a repeat of 2014-2015? During that time, ASHR went from $16 to $40 (more than doubled)

I would think that the Federal Reserve's money printing has a role here as well. It could be both Chinese domestic stock enthusiasm, plus foreign investors using things like ASHR to chase the next big bubble.

Maybe we'll get simultaneous bubbles in QQQ and ASHR? Boy would that be exciting.


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## james4beach (Nov 15, 2012)

Here is the year-to-date return of a few things, all converted to CAD:

S&P 500 (using ZSP) ... 4%
ASHR, China index ... 22%
NASDAQ (using ZNQ) ... 27%
Canadian tech (XIT) ... 42%

Let me remind you, these ^ are just 2020 returns! As in, if you bought right before the pandemic, you'd now be up 22% for China, up 42% for Canadian tech.

Does anyone think that these might continue performing spectacularly through the rest of this year? This could be an amazing year for bubble areas.


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## :) lonewolf (Feb 9, 2020)

Buy 5 up 3 down. Sell 5 down 3 up


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## james4beach (Nov 15, 2012)

Here's Jim Cramer on a total high from Federal Reserve stimulus. It's not a bubble!

His argument: stimulus and low interest rates are great. Some inflation in assets is much better than a deflation spiral.


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## john.cray (Dec 7, 2016)

How timely is Ben's latest video


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## james4beach (Nov 15, 2012)

john.cray said:


> How timely is Ben's latest video


Thank for posting! Love the contrast of the above, loony emotional Cramer followed by cool and calm Ben Felix.


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## andrewf (Mar 1, 2010)

james4beach said:


> Here's Jim Cramer on a total high from Federal Reserve stimulus. It's not a bubble!
> 
> His argument: stimulus and low interest rates are great. Some inflation in assets is much better than a deflation spiral.


Deflation would be disastrous.


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## john.cray (Dec 7, 2016)

For the interested - here's the related Rational Reminder from Ben and Cameron on the topic of "money printing". Just a bit longer and explained with more nuances.


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## james4beach (Nov 15, 2012)

john.cray said:


> For the interested - here's the related Rational Reminder from Ben and Cameron on the topic of "money printing". Just a bit longer and explained with more nuances.


Great links, thanks.

Notice that Ben Felix says that current central bank stimulus programs are misunderstood, and we could be dealing with deflation (like Japan got).


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## james4beach (Nov 15, 2012)

john.cray said:


> For the interested - here's the related Rational Reminder from Ben and Cameron on the topic of "money printing". Just a bit longer and explained with more nuances.


I watched the PWL videos. His main argument is that central bank stimulus doesn't cause inflation, though he does talk about how it boosts asset prices. He says that the central bank is not the main factor behind stock market gains, though.

I would argue (and I think Ben might agree) that the central bank is at least a _significant_ force in the stock market. This new Bloomberg article recaps this by looking at the striking correlations between the Federal Reserve policy rate and the stock market. Since the financial crisis, the Fed has exhausted its policy rate and has moved on to QE, and those correlations are shown in this article as well.

The Fed’s Stocks Policy Is Exuberantly Asymmetric

They're showing the S&P 500 versus Federal Reserve stimulus measures going back to 1998. The correlations are very notable. For example, they zoom in on the March liquidity crunch. The rally in the S&P 500 begins as soon as the Federal Reserve starts buying bonds aggressively.

They point out that correlation is not the same as causation. Just because Fed actions correlate so well to the S&P 500 doesn't mean the Fed is driving the S&P 500 index.

There's new research that analyzes the stock movements and Federal Reserve balance sheet. This research appears to show the casual link. _First_ stocks decline, _then_ the Federal Reserve responds with balance sheet actions about a month later. The statistics in this study seem to show the causal linkage.



> When it comes to explaining the amazing stocks rally, which continues as the world is ravaged by a miserable economy and a pandemic that refuses to be extinguished, *Putnins was able to confirm that the Fed has had a lot to do with it* (although not everything).


Thing is, analysts have known for quite a few years that the Federal Reserve "drives" the S&P 500 index. BMO had a research paper on this back in something like 2012. This new study further supports that theory. This one also shows that the Federal Reserve skews towards making asset prices go up. They respond strongly to drops in stocks, but the reverse is much weaker. They take actions that stimulate the market higher, on average.

I think it's clear at this point that the Federal Reserve manipulates the stock market upward. They respond to declines in stocks with policy actions which manipulate the market, and push the S&P 500 index higher. By repeatedly doing this, they help eliminate fear of prolonged stock declines, and also encourage bolder risk-taking since nobody fears consequences. Investors become accustomed to "buying the dip" and expect all corrections to be brief. Nobody is concerned about significant declines.


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## james4beach (Nov 15, 2012)

There's a growing belief that for the last few months, institutions have used options to manipulate the market and drive this crazy rally

Options Traders Whipped Up Stock Boom With SoftBank Buying

Analysts believe that aggressive call buyers, like at Softbank, pushed the market higher with outlandish call positions -- 10s of billions $ of pure call options, without disclosures. This resulted in a feedback loop and more general buying.

If this is true than you should NOT want to join this rally as it means it's not based on fundamentals, or even on investor sentiment.


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## james4beach (Nov 15, 2012)

Nobody is concerned about this Softbank options issue? It appears to be a major cause of the NASDAQ melt-up. I would be very worried if I was long tech.

It's not too often that you get market-moving manipulations of this magnitude which also influence the primary indexes.


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## londoncalling (Sep 17, 2011)

I am guessing we will see what next week brings. This could get interesting. As I don't hold any of the FAANGs I am primarily a spectator. If the rest of the market tumbles with it then I am a spectator who got hit watching the game.


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## MrBlackhill (Jun 10, 2020)

I was planning to buy some NASDAQ-indexing ETF at the end of the year, but only if its valuation cools off. I currently have "only" 25% tech and its all Canadian stocks and they were bought on their valuation trend. (I looked at their fundamentals too, obviously.)

And both of these graphs (short-term trend and long-term trend) of the valuation of NASDAQ are telling me to be patient and cautious. I stopped buying at the beginning of June. July was becoming dangerous and August even worse. We've seen a bit of a correction recently. I expect NASDAQ to drop around 10 500, which would be another -8% drop in total in the next weeks/months.


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## Topo (Aug 31, 2019)

james4beach said:


> There's a growing belief that for the last few months, institutions have used options to manipulate the market and drive this crazy rally
> 
> Options Traders Whipped Up Stock Boom With SoftBank Buying
> 
> ...


This something very interesting that I haven't been able to figure out. What is their strategy with this call buying frenzy? Are the LEAPs or short term options? With billions of dollars in investable funds, do they still need leverage?

How are they going to unwind those positions? The only way I can think of is if they exercise them. Otherwise dumping so many calls will crash the market and make a decent exit impossible.


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## james4beach (Nov 15, 2012)

Topo said:


> This something very interesting that I haven't been able to figure out. What is their strategy with this call buying frenzy? Are the LEAPs or short term options? With billions of dollars in investable funds, do they still need leverage?
> 
> How are they going to unwind those positions? The only way I can think of is if they exercise them. Otherwise dumping so many calls will crash the market and make a decent exit impossible.


I don't fully understand it. I think it's likely that Wall Street firms (who carefully watch the options market) know which expiry dates Softbank holds and probably know what the exit / unwind would look like. Since they can trade on this privileged information, I doubt they will share it with us.

Just another example of how we retail investors fumble around in the dark, clueless about what's going on in the market, when Institutions know better. Their teams of analysts can figure out this stuff... once they've put on their trades, then the news can go public because it's worthless information now. They are always better positioned than us.

It's funny that retail investors think that having CNBC and news alerts on their smart phones gives them any kind of trading edge at all.


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## Topo (Aug 31, 2019)

james4beach said:


> I don't fully understand it. I think it's likely that Wall Street firms (who carefully watch the options market) know which expiry dates Softbank holds and probably know what the exit / unwind would look like. Since they can trade on this privileged information, I doubt they will share it with us.
> 
> Just another example of how we retail investors fumble around in the dark, clueless about what's going on in the market, when Institutions know better. Their teams of analysts can figure out this stuff... once they've put on their trades, then the news can go public because it's worthless information now. They are always better positioned than us.
> 
> It's funny that retail investors think that having CNBC and news alerts on their smart phones gives them any kind of trading edge at all.


It would be interesting to see how the market would react on option expiry days (eg Sep 18th). There might be some interesting/spooky action going on...

One good thing about index investing is that you are indifferent to players trading the market, since the algebraic sum of all active investors' trades is zero.


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## james4beach (Nov 15, 2012)

Topo said:


> It would be interesting to see how the market would react on option expiry days (eg Sep 18th). There might be some interesting/spooky action going on...


And I think there's a quadruple witching coming up this month, perhaps?



Topo said:


> One good thing about index investing is that you are indifferent to players trading the market, since the algebraic sum of all active investors' trades is zero.


Absolutely! Passive index investing and dumb old asset allocation is the one way to beat Wall Street at this game. I continue to keep my RRSP purely in passive indexing (and regret nothing), though I will admit to more active experiments elsewhere.

The more I learned about Wall Street's tricks over the years, the more I like indexing.


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## Topo (Aug 31, 2019)

james4beach said:


> And I think there's a quadruple witching coming up this month, perhaps?


I think it is next Friday, Sep 18th. But I am not sure if any of Son's options expire on that date. If there is a lot of volatility, that could be a sign. We shall see.


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## OptsyEagle (Nov 29, 2009)

More on Softbank.









SoftBank shares dive on reports that Masa Son has been betting big on tech stocks


SoftBank's shares plunged more than 7% Monday, wiping out roughly $8 billion in value, as investors reacted to reports that the Japanese conglomerate has been making massive bets on major tech stocks.




www.cnn.com


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## Topo (Aug 31, 2019)

OptsyEagle said:


> More on Softbank.
> 
> 
> 
> ...


Interesting article. I wonder if they were buying calls to lock in the price of stocks they wanted to buy after sale of their other assets. The problem is that by buying call options, they pushed the price higher anyway.




> The company bought roughly $4 billion worth of options..... the options generated an exposure of about $50 billion.





> ...SoftBank (SFTBF) is sitting on trading gains of about $4 billion from the bets.


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## james4beach (Nov 15, 2012)

Topo said:


> Interesting article. I wonder if they were buying calls to lock in the price of stocks they wanted to buy after sale of their other assets. The problem is that by buying call options, they pushed the price higher anyway.


It might have been a valid hedge or something, except it was large enough to move the market.

I never bought the story that kids on Robinhood were making the NASDAQ rally 60%. That young demographic doesn't have enough money to move markets like that. That's why they are excited about fractional shares... they typically can't even afford one AAPL share.


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