2023-08-17 07:02:52 ET
Summary
- Michael Burry has made potentially significant investments against the US stock market, indicating a bearish outlook.
- He has purchased put options on the SPDR S&P 500 ETF Trust and the Invesco QQQ Trust Series 1.
- The bet totals 1.6 Billion in notional value, though this is not the bet size itself.
Michael Burry is well known for making a fortune by betting against the U.S. housing market before the 2008 financial crisis. Most notable was his feature in the book and movie "The Big Short", which followed his prescient trade. Quarter after quarter, Michael seems to outperform the markets, and returned a stunning 194% in the last 3 years. This raises the question, why is he betting against America again?
In this article, we will explore Burry's latest investment moves, which reveal a bearish outlook on the US stock market. We will also examine his portfolio, which consists of what appears to be nearly 1.6 Billion (In notional value) put options on two of the most well-known exchange-traded funds: the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust Series 1 (QQQ). We will also analyze his potential thesis for making such a seemingly bold bet and what it means for us.
SPY and QQQ are Exchange Traded Funds that mirror the performance of the S&P 500 and Nasdaq 100 indices, respectively. They are popularly used by investors as indicators for the U.S. Stock market since they represent some of the most influential companies across sectors. By purchasing put options on these ETFs, Burry is essentially expressing his belief that their prices will experience a decline in the future.
What is his reasoning behind this perspective?. What gains or losses does he anticipate from this trade? Read on to discover more about Michael Burry's bets, against America.
The Trade
In his filing for the quarter ending June 30, 2023, Burry disclosed some significant investments against the US stock market and the tech sector. He used put options on two exchange-traded funds.
A put option is a type of contract that grants the buyer the right, but not the obligation, to sell an asset at a predetermined price (known as the strike price) before or on a specific date (known as the expiration date). To acquire this right, the buyer pays a premium to the seller or writer of the option. The buyer benefits from this option if the price of the asset falls below the strike price minus the premium paid. If the price of the asset remains above this level or if it expires without any value, then it becomes profitable for sellers.
As per Burry's filing report, he purchased 20,000 put options on SPY and another 20,000 put options on QQQ during Q2 of 2023. However, Burry's specific details regarding his put options are not disclosed in his 13F filing. We remain unaware of the strike prices or expiration dates he selected for his options or how much he paid for them. It's also unclear whether he hedged or leveraged his bets by selling options or securities. Consequently, we cannot estimate the amount of money he invested in these options or determine how much he stands to gain or lose from them. Furthermore, we cannot infer his expectations regarding both the direction and magnitude of price movements for SPY and QQQ.
What we do know is that Burry put options have a value of $739 million. This means that if he were to exercise his options at their market prices, this would be the amount of money he would receive. However, it's important to note that the value of these options doesn't solely rely on their market prices. Their intrinsic value is determined by the difference between their strike prices and market prices (if positive). Additionally, the delta of an option indicates how its price changes in response to shifts in the asset price. For instance, a put option with a delta of 0.5 means that for every $1 decrease in the price of SPY or QQQ, the options value increases by $0.50.
Moreover, Burry's put options are probably term as they come with expiration dates within months or weeks. This suggests that he times his bets to align with catalysts or events that might cause a market decline. Short-term options tend to have premiums and decay rates compared to long-term options, which means they lose value quickly as they get closer to their expiration dates. They are also more responsive to fluctuations in volatility and interest rates compared to long-term options.
The Big Misconception
Before we rush to any conclusions regarding Burry's pessimism, it is crucial to understand how put options are disclosed in 13F filings and why they might not accurately represent the extent and nature of his investments. A put option is an agreement that grants the buyer the right, but not the obligation, to sell an asset at a predetermined price (known as the strike price) either before or, on a specific date (known as the expiration date). The buyer pays a premium to the seller (or writer) of the option in exchange for this right. The buyer realizes profits from the option if the price of the asset dips below the strike price minus the premium paid. Conversely, if the price of the asset remains above or equal to the strike price minus the premium paid or if the option expires worthless then it's profitable for sellers.
In 13F filings, put options are reported based on their market value, which considers factors such as underlying asset prices, strike prices, expiration dates, volatility levels associated with those assets, and interest rates. However, it is important to note that market value does not necessarily reflect value-an option's intrinsic value represents the difference between its strike price and the current market price of underlying assets.
For instance, let's consider a scenario where there is a put option, on SPY. This option has a strike price of $400 and an expiration date of December 31, 2023. If SPY is currently trading at $420, the market value of this put option might be $10 per contract. However, its intrinsic value would be zero in this situation. It's important to note that the market value of a put option doesn't reflect its delta. Delta measures how the options price changes in response to changes in the asset price. For example, if a put option has a delta of 0.5, it means that for every $1 decrease in SPY's price, the options price increases by $0.50.
Considering Michael Burry's 13F filing, it becomes unclear how much money he has actually invested in his put options or what gains or losses he might face from them. Furthermore, we can't determine his expectations regarding the direction and magnitude of SPY and QQQ price movements based on this filing. It is possible that he purchased out-of-the-money put options with market values and deltas as an indication of his belief in a substantial and sudden crash occurring in both the SPY and QQQ markets. Alternatively, he might have purchased options that are at or slightly below the current market price with higher values and deltas. This suggests that he is protecting himself against a moderate decline in SPY and QQQ. It's also possible that he has sold options or securities to balance or minimize his exposure to these options.
Here is a direct quote from his filing.
"Please note that the Investment Manager is reporting long put option positions on this Form 13F in the manner prescribed by Special Instruction 10 and FAQs 41 and 44 (i.e., gross long put options reported in terms of the securities underlying the options). As such, the reported value in this Form 13F is different from the actual value of such unexercised long put options as reflected in the Investment Manager's books and records, and the Form 13F report excludes any short positions on the Investment Manager's books and records, which may serve to hedge the long positions."
To summarize, 13F filings do not accurately represent the nature of options since they only display their market values failing to capture their intrinsic values or deltas. To fully comprehend Burry's wagers on SPY and QQQ, we would need information regarding his put options, such as their strike prices, expiration dates, premiums paid or received, and any other positions he may have taken to hedge or amplify his bets.
Investment Strategy -- How You Can Profit
I will not advise individuals to follow Burry's trade by initiating short positions or buying put options. It's far too difficult to ascertain his specific options contract. I will, however, offer a few options for those who share The Doc's sentiments.
Consider investing in Inverse ETFs as a cost-effective approach to capitalize on a market decline. However, it's important to note that there are some drawbacks associated with these funds. Inverse ETFs aim to provide the performance of an underlying index or asset. For instance, the ProShares Short S&P 500 (SH) seeks to deliver a return that's of the S&P 500 while the ProShares UltraShort QQQ (QID) aims for a daily return that is 2x of the Nasdaq 100. The advantage of buying these ETFs is that you can acquire them like stocks without any premiums or interest charges. Nevertheless, it's crucial to understand that they are not suitable, for long term holding due to their tendency to lose value over time because of compounding effects and management fees. Keep an eye on them. Make necessary adjustments based on your positions.
Another sensible strategy is diversifying your portfolio, which can help protect you during market downturns while also allowing you to benefit from opportunities across sectors and regions. To achieve this diversification, allocate some of your funds towards assets with negative correlation, with the US stock market and tech sector. This may include bonds, gold, commodities, foreign stocks or alternative investments. You also have the option of utilizing asset allocation tools or robo-advisors to assist in developing a rounded investment portfolio that aligns with your risk tolerance and investment goals.
Takeaway
Burry did not initiate a new "Big Short". Though it is true, Burry's put options are expressions of his bearish outlook. He is betting against the prevailing market sentiment and trend, and challenging the status quo. He is looking for undervalued and overlooked opportunities and exploiting market inefficiencies, anomalies, and bubbles. Whether he will be proven right or wrong remains to be seen, but one thing is certain: he is not afraid to make bold, and contrarian moves and we would be wise to take note of them.
For further details see:
Michael Burry Did Not Initiate Another 'Big Short,' But He Did Bet Against America