Michael Burry Bet Against Market is one of the most famous legends of Wall Street. Michael Burry is one of the few financial business names that everyone knows. Since the movie “The Big Short,” which praised Burry for being right about the financial crisis of 2008, came out, he has become a synonym for smart dealing. He started and runs Scion Asset Management, a hedge fund that has more than $2 billion in assets. Let’s find out the whole story with us.
Michael Burry Bet Against Market: Why, How, and What’s Next?
Michael Burry is a well-known investor who rose to fame for his successful prediction of the 2008 financial crisis, which was depicted in the movie “The Big Short”. He is also the founder and head of Scion Asset Management, a hedge fund that manages over $2 billion in assets.
Recently, Burry made headlines again for his massive bet against the stock market, which he revealed in his latest SEC filings. According to the filings, Burry has bought put options worth $1.6 billion against two major stock market indexes: the S&P 500 and the Nasdaq 100. This means that he is betting that these indexes will fall in value in the near future, and he will profit from their decline.
Why is Burry betting against the market?
Burry has not publicly explained his rationale for his bearish bet, but he has hinted at some of his concerns on his Twitter account, which he has since deleted. In his tweets, he warned about the dangers of inflation, excessive debt, market bubbles, and government intervention. He also criticized the Federal Reserve’s monetary policy, which he said was creating artificial demand and distorting asset prices. He compared the current situation to the dot-com bubble of the late 1990s and the housing bubble of the mid-2000s, which both ended in spectacular crashes.
Burry also expressed his skepticism about some of the most popular and highly valued stocks in the market, especially those in the technology sector. He singled out Tesla, which he said was overvalued and facing increasing competition. He also revealed that he had shorted Tesla’s stock, meaning that he had borrowed and sold it, hoping to buy it back at a lower price later. He also questioned the hype around cryptocurrencies, meme stocks, and SPACs (special purpose acquisition companies), which he said were driven by speculation and irrationality.
How is Burry betting against the market?
Burry is using put options to bet against the market. A put option is a contract that gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price (called the strike price) before a certain date (called the expiration date). The buyer pays a fee (called the premium) to the seller (called the writer) of the option for this right. The buyer profits from the option if the underlying asset falls below the strike price before the expiration date, while the seller profits if the opposite happens.
Burry has bought put options against two exchange-traded funds (ETFs) that track two major stock market indexes: the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Trust ETF (QQQ). These ETFs are composed of stocks that represent a large portion of the US stock market’s value and performance. The SPY tracks the S&P 500 index, which consists of 500 large-cap US companies across various sectors. The QQQ tracks the Nasdaq 100 index, which consists of 100 large-cap US companies that are mostly in the technology sector.
According to his SEC filings, Burry has bought put options with various strike prices and expiration dates for both ETFs. As of June 30, 2023, he had put options worth $866 million against SPY and $739 million against QQQ. These options represent more than 90% of his portfolio’s value, indicating his high conviction in his bearish bet.
What are the risks and rewards of Burry’s bet?
Burry’s bet is a high-risk, high-reward strategy that could pay off handsomely or backfire spectacularly depending on how the market moves in the coming months. If Burry is right and the market crashes or corrects significantly before his options expire, he could make huge profits from his bet. For example, if SPY drops from its current level of around $442 to $300 by December 2023, Burry could make more than $2 billion from his SPY put options. Similarly, if QQQ drops from its current level of around $368 to $250 by December 2023, Burry could make more than $1.5 billion from his QQQ put options.
However, if Burry is wrong and the market continues to rise or stays flat before his options expire, he could lose most or all of his investment in his bet. Unlike shorting stocks, which has unlimited downside risk, buying put options has limited downside risk, which is equal to the premium paid for the options. However, this premium can be substantial, especially for options that are far out of the money (meaning that the strike price is much lower than the current price of the underlying asset) and have a long time to expiration.
For example, Burry’s SPY put options with a strike price of $300 and an expiration date of December 2023 have a premium of around $6.50 per share. This means that Burry paid around $65 million for these options, which he will lose if SPY does not drop below $300 by December 2023.
What’s next for Burry and the market?
Burry’s bet against the market has attracted a lot of attention and speculation from the media and the investing community. Some have praised him for his contrarian and courageous stance, while others have criticized him for his pessimistic and reckless gamble. Some have compared him to other famous investors who have made similar bets in the past, such as George Soros, who broke the Bank of England in 1992 by betting against the British pound, or David Einhorn, who shorted Lehman Brothers before its collapse in 2008.
However, Burry’s bet is not necessarily a reflection of his overall view on the market or the economy. In fact, he has also been buying stocks recently, according to his SEC filings. As of June 30, 2023, he had long positions in 22 stocks, worth around $150 million. These stocks include companies in various sectors, such as healthcare, energy, consumer staples, and industrials. Some of his top holdings are CVS Health, Cardinal Health, Kraft Heinz, and Chevron. These stocks suggest that Burry is also looking for value and stability in some segments of the market.
Burry’s bet is also not a guarantee or a prophecy of what will happen to the market in the future. The market is influenced by many factors that are unpredictable and dynamic, such as earnings, interest rates, inflation, consumer sentiment, geopolitics, and natural disasters. The market can also be irrational and inefficient at times, defying expectations and logic. Therefore, Burry’s bet is just one of many possible scenarios that could play out in the coming months.
Conclusion for Michael Burry Bet Against Market
In conclusion, Michael Burry’s market bet continues to captivate the financial world, sparking praise, criticism, and fervent speculation. While his contrarian stance is attention-grabbing, it is but one of many possible scenarios that may unfold in the months to come. Investors should remember that the market is influenced by an array of unpredictable factors, and maintaining a diversified, well-researched portfolio remains a key tenet of sound investment strategy.
Burry’s gamble serves as a potent reminder that in the ever-changing landscape of finance, independent thinking, and careful analysis are invaluable assets for navigating uncertainty. Thank you for visiting us, see you soon.