The trades were revealed just as Wall Street's runaway technology-led rally was faltering. The derivatives purchases could shed light on the Nasdaq and S&P 500 rise just two days ago to record highs, which seemed to put the coronavirus sell-off in the rearview mirror.
In August, SoftBank Chief Executive Masayoshi Son had announced a new investment management subsidiary that would park excess cash from a massive asset sale program in liquid stocks.
In total, SoftBank injected roughly $4 billion building up stakes in Amazon.com Inc, Netflix Inc, Tesla Inc, Microsoft Corp and Alphabet Inc , according to regulatory filings.
SoftBank bought a roughly equal amount of call options tied to the shares it bought, according to the Wall Street Journal. Investors typically pay premiums to buy call options, which give them access to a much higher amount of shares on paper.
SoftBank's options of $4 billion generated an exposure of about $50 billion, according to the WSJ report.
So far, SoftBank has spent roughly $10 billion buying shares. It has also spent more buying derivatives in U.S. stocks, the sources told Reuters. The Financial Times first reported on these derivative purchases on Friday.
But market players were unable to gauge the extent to which Softbank's derivative purchases contributed to recent gains. Nor was there strong evidence that the end of the buying could have triggered the stocks tumble on Thursday and Friday.
Raymond James market strategist Ellis Phifer said the buying by SoftBank would have helped push up shares of tech companies in recent months, although the stocks were benefiting from other trends. The extra demand from SoftBank "would have created a positive feedback loop," he said.
For graphic on SoftBank U.S. Top 10 Holdings:
SOFTBANK'S TECH BET
SoftBank has received $42 billion in cash from a string of recent asset divestments, including the sale of stakes in its Japanese telecommunications unit, wireless carrier T-Mobile US and Chinese e-commerce giant Alibaba Group.
The latest bet on publicly listed tech stocks represent a departure for SoftBank.
It has been under pressure from hedge fund Elliott Management to use this cash to pay down debt and buy back shares, after its attempt to raise a second $100 billion Vision Fund struggled because of the lukewarm investment performance of its predecessor and faltering bets .
SoftBank has been temporarily investing some of the proceeds from the asset sales in the U.S. stock market before returning it to shareholders and paying down debt.
A SoftBank spokeswoman declined to comment.
Reuters could not immediately determine what options strategy, or combination of put options and call options, SoftBank used. Hedging around the purchase and sale of options can magnify moves in the underlying market.
Call options gain in value when prices rise, while puts rise when prices fall.
Buying options can be a cheaper way of investing in an underlying security than direct purchases. But selling uncovered options can be extremely risky. Options prices are determined by factors such as how far away the strike price is, the time to maturity and how volatile the markets are.
The main indexes on Friday were recoiling from the all-time highs hit midweek. The Nasdaq was on track for its biggest two-day fall since March as investors dumped heavyweight technology stocks, while concerns around a patchy economic recovery also hit the S&P 500 and the blue-chip Dow.
"If SoftBank was selling puts its a very dangerous strategy. The big questions are - the scale of what they were doing and are they selling puts to buy calls - because that's when you get embedded leverage," said Michael Purves, founder and CEO of Tallbacken Capital.
(Writing by Alden Bentley; reporting by Greg Roumeliotis in New York and Anirban Sen in Bengaluru, Ross Kerber in Boston, Megan Davies and Alden Bentley in New York; Editing by Tom Brown and David Gregorio)
By Greg Roumeliotis, Alden Bentley and Anirban Sen