From the Markets Desk - “Whale Watching”
When whaling was an accepted practice, the call of “Thar she blows” was the signal that the whale(s) unfortunately tipped their location to the hunters. The water spouts these majestic animals shoot into the air were often their demise.
In the financial world it is common to call a large trader or institution a “whale”. When they start an investment position, the dollar amount they put to work creates a ripple investors can notice.
Back in the day you would only see these massive trades by scanning or manually charting the volume of each trading day. Both for individual stocks or indices. Now thanks to computers everyone can create a “volume scan” that automatically brings trade activity splashes into view.
The theory goes that when these types of footprints appear, there could be a change in price direction. Or the “whale” may have particular information that the rest of the investment world does not have. In the purest sense, if you see them, you must investigate.
George Soros went down as a champion for his trade because he netted over an estimated $1 billion in profit. Mr. Iksil got blown out. The investors who took the other side of Iksil’s trade were handsomely rewarded.
This is a good spot to let readers know that just because a whale is in motion - profits are not a guarantee.
Around August, footprints of another “whale” started to come to light. This time it was in the US stock option market. Notably Nasdaq technology shares.
There are two types of options. There are calls and puts. A call gives the buyer an option to BUY a stock at a specific price during a specific period. A put gives the buyer an option to SELL at a specific price. Like insurance.
The thing to remember about options (and all trades) is that there are two sides to each trade. A buyer and a seller. The situation in August revolved around buyers of calls.
When you buy a call option the person on the other side of the trade tends to be a bank or institution. When they sell you the call they receive a payment from you. They then hedge their position by buying the stock tied to the option.
Here is a simple example:
You believe Apple stock is going to trade higher in price by the end of year. You either pony up the full cash amount or you buy an option for a fraction of the cost.
If you buy the options, the seller of those options will buy Apple stock to hedge their risk.
As you can imagine this could produce a positive feedback loop. If more and more people buy similar options betting on higher prices, the banks will need to buy more and more stock to hedge. A self fulfilling prophecy!
This is what appears to have happened in August- Softbank was splashing roughly $30 billion to options of US tech heavyweights (source: Financial Times
). This caught the attention of retail investors who also started to buy options. This forced the banks to buy stocks outright. Up, up and away they went.
However, all things do come to an end.
The August “melt up” stopped at a new all-time high as the calendar flipped to September. The markets then had a violent week of a sell-off and have not gained ground since then.