I'm not sure the bet is as big as it seems from the headline. When you buy options, you pay a fixed premium to get the right to buy/sell a very large value of shares, called the notional. But the notional is not what you are losing if it goes wrong, you lose the premium. The premium can be quite a small number compared to the notional.
On a single contract, maybe, but remember that the counterparty is usually a market maker who doesn't take directional risk, their game is to bet that the cost of delta hedging is less than the premium they collect, and that's more of an implied vs realized volatility thing than a directional thing. Even if we took it for granted that Michael Burry was smart money, to a first order approximation the dealers don't care and would be happy to earn fees for managing his leverage.
Not the OP. I agree with what OP is mentioning. As part of the report you have to file the notional value of the underlying stock. Let's assume I buy one put option for palantir at a price of $1/contract ( say for an extremely OTM strike price of $10 ). I have paid a premium of $100. Assuming stock price of palantir is $200, the notional value I have to report is $200*100 = $20k. And not the $100 premium I paid.
They are only selling puts...that's a half-hearted short. They have the resources to borrow shares and bag the whole amount without a time constraint...why not do that?
It is commonly referred to as a ‘short position’, though it is not ‘shorting the stock’. Equally, purchasing calls* is referred to as a ‘long position’ (as is holding the equity).
edit: smallmancontrov below pointed out that I wrote 'purchasing puts' was long, when I meant to write 'purchasing calls'
Just because something is expensive doesn’t mean you should short it via puts as Burry had done. Both Palantir and Nvidia have high IVs. You’re paying for that. You’re much better off looking for cheaper puts on securities with enough correlation. Since Volmageddon and pandemic craze, deep OTM options have been scalped to death. Rarely good value. Nvidia also didn’t report earnings yet which means you’re paying for that risk event. Not saying bullish or bearish. It’s all speculation BOTH ways.
Glad to see someone say it. A lot of people have a hypothesis about the market, but fail to do the follow through to see if the market has already priced that in. The real aim should be to see when your model (mental or mathematical) prices things differently than the market.
In this case, it's actually quite reasonable to believe that the market has over priced the risk no matter how "sure" anyone is that these companies are over valued. It's entirely reasonable to pay for an option that you think reflects an unlikely scenario, but you also believe is mispriced notably by the market.
With options, the market has nearly always priced in the obvious risk. But not the non-obvious risk. Burry is not just saying, “I think these companies are overvalued.” Rather, he’s saying, “I think the bubble is about ready to pop.” While many people see the bubble, Burry is making a bet on the timing of the pop.
Yeah, my (limited) understanding is that the GP's argument would be valid for an options trader who looks for pricing inefficiencies to take advantage of (regardless of bullish/bearish outlook) but not _that_ important for someone betting on a black swan event?
If your bet pays off, the price of the stock will decrease. Delta predicts how your option will increase in value with that; gamma if that relationship will accelerate or buffer. Vega, meanwhile, informs that the price suddenly crashing is volatility, which increases the value of your options.
Succinctly, if you are betting on a crash, options offer advantages. (And if the market, but not your company, gets bailed out, vega could put you middlingly in the black.)
Former options market maker here. We have insufficient data to conclude that.
I also happen to have experience unwinding correlation books after their originators shat the bed. Predicting a crisis is hard. Predicting correlations in a crisis for esoteric assets is almost impossible.
Burry wanted to bet on specific overvalued stocks. Not a general market crash. For that, puts are probably the best tool if the expectation is a sharp correction followed by, in all likelihood, a Trump put.
Can someone explain why puts make sense over shorting? For example, I'm betting against 5 quantum computing companies with short positions. I considered adding puts to the position, but it didn't make sense based on 2 reasons: High bid ask spread, and if it's a fraudulent company/otherwise worth betting against, the volatility will be high, so you option costs too much compared to the upside; the amount it has to drop to break even is too big.
Yea; true. My thought when evaluating these was "I am confident the price will drop significantly within the next 6-18 months. But if I screw up the timing, or it drops to 1/3 the value instead of 1/2 etc, I lose money or break even. While I'm reasonably confident the normal short will pay off, since I don't have to nail the amount or timing.
With shorting, you run the additional risks that you could lose the borrow and be forced to buy back at any time. Or get margin called if the price moves against you. With puts, you have to get the timing right, but no external factors can force you out of your position.
Even if you're right, but the value goes up before going down, you can lose out with a short, if your counter-party makes a call for collateral you don't have.
Derivative markets are almost always there to provide leverage. Yeah, thinly traded options are a significant downside. If you can get in and out of the contracts, you can always combine options to remove some of those volatility costs by selling as well as buying, ie, spreads and ratios.
Options are just that - an option to transact at a certain price, if you choose not to you're just out the premium you pay. Short selling involves an obligation to return the shares, which has (theoretically) unlimited downside.
The market will correct before mid-terms next year. This is almost a certainty. By how much and when exactly - now, that's where the shorting profits are.
PS. Burry infamously made several more bets after the "big short", bets that misfired. That is, his record is far from being 100% right.
It being a certainty is wrong, but there is a huge differential between the growth of total market value and the lackluster fundamentals, GDP growth, and jobs numbers.
To put another way, there's a lot of "potential energy" being built up in the markets right now. That doesn't necessarily mean they'll pop like a bubble - but there's really no precedent for them to continue rising.
He has no idea, I'm guessing it's wishful thinking, likely from a political partisan, or someone with a lot of dry powder trying to enter the stock market after a correction.
Reminder that economist have predicted 9 of the past 7 recessions.
General handwavy statements like "there's a bubble" aren't worth paying attention to. Ones with specific timelines attached to it (like the one above, or the article we're commenting on), are worth listening to a bit more, but unless they have the funds to back it up (like Michael Burry has put down here), it's still hot air.
Palantir has a market cap of $400B+ and Nvidia is $5T. This short translates to 0.225% and 0.00374%. This mostly translates to a thesis that the stocks would “probably” go down a bit than a bet that predicts recession.
It seems like the economy is on a “K” shaped flywheel. How much worse can the economy get for the regular worker before the systems just pops? We’ve put so much speculation into an AI/tech salvation that seems premature, especially when you look at ROI vs depreciation timelines.
I’m not sure what timeline to place on that but there has to be a floor for how bad it can get for the regular man.
Shit is just expensive. Young people can’t buy houses, good jobs are drying up, and inflation isn’t stopping.
I'm sure the Fed chart is accurately measuring what it's measuring but when I was a kid in Southern California it was normal to buy a house and raise kids on a single teacher or construction worker salary. That has become nearly impossible over the past couple decades. Many others have seen similar changes in their own areas and I don't think they're being crazy when they say it has gotten much harder to finance a normal household on a normal salary.
I don't know what the disconnect is with that chart and people's observations. Is that chart controlling for number of incomes and hours worked? If a household income increases by 20% because the members are working a combined 80% more hours that's not great. Category differences in inflation might be another factor. Sure TVs and other niceties are a lot cheaper, but essentials like housing and medical care eat up a huge portion of most budgets.
Slightly overestimates. Alternatives like Truflation show it lower.
You may be thinking of Shadowstats, which is run by a crank who just takes the official numbers and adds a number he made up to them.
I don't know why cranks always think inflation is secretly higher. Deflation is a lot worse than inflation, so if you're a doomer, believing in deflation would be more effective.
The idea that CPI sucks is far from a conspiracy theory... not sure why you're trying to color it like that.
The problem is that the error integrates over time, which IMHO is why graphs like that seem to suggest our standard of living is higher than ever... when a conversation with anyone at a local bus stop will tell you the exact opposite.
Intervening as if there were a recession inminent when it is not also has harms (the exact same as the harms when recession interventions are maintained too long or employed too intensely, in terms of inflation, etc.), so I wouldn't agree that your central bank is bad if you happened to have guessed right once, but only if you have a demonstrably accurate objective method.
Political volatility and the dirty nasty hustle on the Trump/republicans' part that will precede the mid-terms. Combined with the general state of bizarre market bonanza of the past few months. It's a powder keg just waiting for a match.
Will it be another "correction" where it pulls back ~10% before going up another 15%?
The powers that be have too much invested in the market continuing to move up, you are basically betting that Trump, a bunch of billionaires and the FED are going to let the market crash to curb inflation and income inequality. That feels like a bad bet to me.
The stock market isn't that important (though Trump does care about it). It's the bond market that everyone pays attention to when it stops working.
In a sense, stock market crashes are good for young people because you can buy stocks cheaper. In practice this isn't true because too many people are in debt and you get a balance sheet recession.
The problem with these kinds of bets is the Fed Put. That's the invisible force levitating stocks. I don't really see that changing unless/until the country genuinely enters a debt or currency crisis. The path is unsustainable, but they'll keep it going as long as they possibly can.
The fed can take nore active measures than just managing rates. I lost some money by unexpectedly finding myself on the opposite side of US government policy - and dollar-firehose - during COVID. Shorting travel-related stocks can be a losing bet if the government wants to "shore up" share prices by directly injecting hitherto unheard of amounts of liquidity into the market.
Uhh... Powell's term as chairman ends in May 2026. His term as a board member ends Jan 2028. Senate confirmation is irrelevant because Trump will not nominate him again for anything.
It's even worse than that, as Palantir is a Party business. Betting against that is like betting whether specific people were going to be airbrushed out of photos in Stalin's Russia. And if you have that kind of insider insight, why short instead of making a positive bet on whomever the new Party darlings are going to be?
Maybe it makes sense based on the dynamic of the Party needing to run through scapegoats? One could possibly see that Palantir is about to be thrown under the bus, but only connected insiders will know who its exact replacement will be? Personally I don't see signs of Palantir being close to the chopping block though.
You're betting against a middle-east Marshall Plan and AIPAC lobbyists vs. a company that just set up its AI industrial Hub in Europe and has some serious compute-engine hosting cost sticker-shock incoming.
As far as I can see, shorting Thiel is shorting Israel at the moment. Don't do it while Trump is in Cabinet and pressuring Tel Aviv to pardon Bibi.
That was actually my own gut reaction to Palantir's valuation. There is some massive entity that is propping that up, and I can easily see it being a state actor.
NVDA on the other hand ...
What are you going to really do about something that posts 40B+ in revenue every quarter? Okay, you can short it I suppose. You'd have to time it with the expected drop off in AI compute spend, which means if you have a history of being early (which Burry does), you will lose.
> never understand what it is about Israel that makes people lose their minds
Availability heuristic [1].
Flat earthers and folks deep in their small-country national politics do the same thing, overestimating the causal weight of the thing they’re obsessing about to any effect.
The useful takeaway is to recognize when you do it in smaller doses. What’s the first explanation you tend to have a hunch for explaining phenomena which are too diverse to be reasonably explained by a single factor.
Thanks for sharing. Michael Bury also shorted S&P 500 in Sep 2023 and closed his position in Nov 2023 for a nice payoff… he seems to know what he is doing.
Is there anything more concrete than that? Large wins on their own aren't meaningful if they aren't good risk adjusted trades or repeatable. I've made big wins but I don't consider myself a good trader.
>Traders following the investments disclosed by Scion’s over the last 3 years (between May of 2020 and May 2023) would have made annualized returns of 56% according to an analysis by Sure Dividend
Seems like Scion Capital could have just disclosed winning trades, that they may or may not have made?
Well his 10 year performance is 255%. Which does not include his bet in 2005-08. Buffett has only done 154% in that time. So rumours of his demise are greatly exaggerated.
He's been bearish for the last n years. His Twitter handle is Cassandra because he tries to warn people about impending doom, but nobody listens. He gave up at one point because he tweeted SELL and then everything was fine.
tl;dr he's a perma bear.
I actually don't think he's wrong, but one thing I've learned is that it's not enough to recognize a bubble. Almost everyone sees the markets are, as they say, frothy. But you need to see if there's a needle nearby. Without that you're just trying to get lucky.
Puts especially are really hard because they expire. They limit your loss compared to shorts, but you need to time it perfectly.
The implication here is that there's a prediction of a crash, but this could equally just be a hedge. Fund managers don't want their whole fund to become devalued if AI-driven valuations collapse. A put against Nvidia helps de-correlated the fund value from AI values.
What is the expiry of those options? And how much of his capital is he betting on them? If I'm not mistaken, what made the big short spectacular was him betting the farm on it. Otherwise, wouldn't it be just another day in the office for him?
As my friend likes to say, Michael Burry has predicted 20 of the last 1 crashes. I saw some apocryphal analysis that showed you'd be beating the S&P 500 (and by a decent margin) if you bought every time he predicted a market crash since the recession.
There is no way a crash happens when everybody thinks it's going to happen. The 2008 prediction was notable because, as shown in the movie, his bet was so contrarian people were refusing to write about it)
Total portfolio 1.4bn in Sep 13F. 0.6bn in June 13F. So yes, my guess is most if not all of that 0.8bn spike is notional in excess of premium on the 1.1bn puts. All the same, 80% of his entire hedge fund notional is still a BIG bet. And he will probably 10x that 1.1bn if he is right.
My two cents... He might think the bubble is about to burst; he might be hedging his downside risk after a serious rise in his overall portfolio, picking the two stocks he thinks are the most out of whack valuation-wise to execute that hedge (the premium for the puts would likely be a fraction of the paper gain he's sitting on so not the end of the world if they expire worthless); he might be hedging significant material gains in these exact two stocks; he might be doing it for some only-billionaires-get-it reason. I guess I'm just saying that the reason could be pretty detached from "I think the bubble is about to burst!"
Overall for the common person I'd agree, but I assume we're all more or less hackers here and for us, I'd say "If you have to ask, ask and learn, then do it".
If everyone followed your advice no one would ever do anything, as we all begin somewhere, something that should OK.
Of course, don't do million dollar trades when you begin, but we shouldn't push back on people wanting to learn, feels very backwards compared to hacker ethos.
we shouldn't push back on people wanting to learn but we should really point out very loudly that not fully understanding something like shorting can turn a small investment someone was fully ok with losing into a life altering bankruptcy due to a margin call.
To expand on the original reply to you - shorting companies, or engaging in almost any stock-based activity beyond “buy and hold,” typically entails much, much higher risk than just buying and selling stock. The most you can lose when buying a share is the purchase price, and that’s fairly unlikely, but when you start getting into even options/etc, you’re magnifying your risk - small swings in the market can lead to large and disproportionate losses, and when you get into shorting in particular you can lose far more than your initial investment. This is why you’re getting the reaction you’re getting - because the thing you’re asking about is sufficiently risky that if you're asking on Hacker News (and not, say, asking a professional), you don’t understand the risk profile well enough to do it “safely.”
That, and because snarky answers get more imaginary internet points than helpful ones.
> you don’t understand the risk profile well enough to do it “safely.”
Since when is this a problem? For gods sake, let people fuck up and harm themselves if they're stupid enough to take the risks, or not.
I think it's fine to say "Remember, this is risky because of A, B and C, but here's how to do it anyways..." but straight up "If you have to ask, you shouldn't" seems so backwards and almost mean, especially when we talk about money which is mostly "easy come, easy go". Let the fool be parted with their money if that's what they want :)
Technically, yes. But you have to own the stock first (‘cuz writing “naked calls” is not for the faint of heart). Easier and less complicated to just buy puts, especially if you’re looking up “money laundering” in the dictionary.
You buy an option that has a particular cost, which gives you the right to sell stock at a specific price in the future (the "strike price"), within a certain time frame. Typically, these are denominated so that you contract to buy or sell 100 shares. In a "naked" put, you don't actually have the stock that you propose to sell. In the future, you plan to "exercise" the option by buying the stock at the market price. and then immediately sell it at the contracted price.
A put option represents a belief that the price will fall, which makes "right to sell the stock" valuable. Similarly, a call option represents a belief that the price will rise. Both can be bought and sold; you do not "make" them but rather trade in them, just as you would in stock. But the relationship between the stock price and the result from an option is not linear; selling a put and buying a call are both nominally "long" the stock, but are not equivalent.[0]
When you buy an option, you are always immediately out for the cost of the option itself (the "premium"). This is separate from the strike price. It's the market's assessment of how much your "right to sell later" is worth, in itself. By doing this, you are speculating that you can recover that money later, based on how the stock performs. (Depending on your strategy, this can involve buying or short-selling the "underlying" stock, as well as other options.)
So if you buy a put, you pay money (the premium) up front, and you potentially just lose that money completely. Sane options strategies take your entire portfolio into account, and use options to hedge the risk profile of the rest of the profile (rather than trying to use the rest of the profile to justify taking on risk using options).
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Some details, and further exploration.
Options represent essentially zero-sum speculation on top of the actual price movement. For example, holding everything else constant, a call option increases in value as the price of the underlying increases (the right to buy stock at a fixed price becomes worth more, when the stock is worth more). When a company does well, everyone who holds the actual stock shares in the company's good fortune; but the profit of call holders comes at the expense of those who sold (or "wrote") those calls.
The option is priced according to market expectations of risk (how likely is it that the stock's price will fall below the chosen mark?), and according to duration (the longer you reserve the right to exercise the option, the more likely it is that you'll get a profitable opportunity; therefore, the more valuable and thus expensive the option is). For long-term options (especially now that interest rates are non-trivial) there's a second meaningful duration factor: buying an option comes with the opportunity cost of not holding cash (or treasury bonds) for that period, and that also has to be priced in.
"American" options give you the right to exercise at any point before the deadline; "European" options only allow you to exercise at the deadline. This is also priced in; having more flexibility is worth more.
If you have chosen well, the market price for the stock goes down by a lot. This allows you to profit when you exercise the option.
If you have chosen poorly, you never get the opportunity to profit. Your options "expire worthless"; an option to sell at a point that has already passed has no value. You have been left holding the bag.
In between, you might exercise in a way that recovers only part of the premium you paid.
Much riskier is to sell options against securities you don't hold. (You will likely be legally barred from attempting this at all, and even wealthy experienced traders will be required to hold some percentage of the security value that their options represent.) You are hoping that the option expires worthless, so that you simply claim its value uninhibited. If it doesn't, you may be "assigned" i.e. legally on the hook for someone else's exercise of the option. If you sold a put, you may be forced to pay an inflated price for a stock that crashed. If you sold a call, you may be forced to acquire stock in order to sell it at a discount in order to fulfill your option. The potential loss for selling a put typically far exceeds the maximum potential profit; the potential loss for selling a naked call is unlimited (as we suppose the stock's value can go to infinity).
But if your sale of a call is "covered", or your sale of a put is "cash secured", this means you fully own the security (underlying stock, or liquid assets respectively) corresponding to the option. The cash secured put still incurs the risk of wiping out your entire cash supply, much as if you'd simply bought 100 shares directly, and it puts a hard limit on your upside. But it lets you profit from the stock without actually holding it.
Given sensibly chosen strike prices, covered calls actually end up with a similar risk/benefit profile. As the stock goes to zero, all you end up with is the option premium, because you were holding the stock. If the stock does well, your net profit is limited to the option premium, because the profit from holding the stock cancels out the liability of the option. (Equivalently: you are required to sell the stock at the strike price, but you already have that stock; no matter how high the underlying stock value gets, you can only claim the strike price.)
[0]: Doing both gives risk exposure roughly equivalent to holding the stock, without actually buying it. This is called a "synthetic long". As you can imagine, that is effectively unlimited leverage in itself, and if you attempt it you will be required to hold a significant amount of cash to limit your leverage, and jump through a lot of regulatory hoops to prove both your competence and solvency. I didn't mention this at the start, because you need the details to understand it.
I did exactly this last Friday as an experiment and Claude Sonnet 4.5 recommended that I go long in an inverse ETF lol. When I told it that was terrible advice, it apologized and suggested buying puts.
If you are having to ask an LLM how to do it, I strongly suggest NOT starting with shorting.
Ask about Put options, which is what Burry is doing here — not even Burry is shorting for this situation.
I'm no expert trader, but the potential losses for shorting are unlimited. You borrow X shares of a stock, and will have to repay your loan in that stock, whatever it costs. If the trade goes against you, you will get a margin call and will need to (re-)fill your account with whatever funds are necessary to pay that amount, or all your other holdings and that position will get sold automatically at whatever that loss amount is. Situations called a "Short Squeeze" arise not infrequently, and even though they are temporary, they can cause a stock price to skyrocket, specifically because so many people are shorting it, and everyone needs to buy to fill their short positions & margin calls. The fact that the price soon falls again helps you not one bit. Plus, the maximum profit is limited to the value of the short. E.g., you short the stock at $100/share, if the company goes bankrupt, you can repay the shares for $zero, making $100/share; but you could lose $1000/share if it goes up 10x.
In contrast, purchasing Put options, the right to sell the stock at a certain price, limits your loss to the cost of the Put options — if your idea turns out to be no good, it just fails and expires worthless.
Do you think they're overpriced? Or do you just not trust retail investors to understand the effective leverage, spread of outcomes etc.?
I'm told that covered-call ETFs generally underperform (in addition to being inefficient) and "generating income" is best accomplished by just selling shares as needed.
Options are always overpriced. They're fundamentally an insurance product. You should expect to lose money when buying insurance. If you're hedging, you should expect to lose on your options leg. Same as with any insurance product.
Options are governed by tight mathematical relationships between each other and with their underlyings. These can be atomically arbitraged, i.e. you don't need someone else to believe your thesis to make money. As a retail investor, you are on the other side of a system designed to efficiently price and reprice options to ensure the dealer doesn't lose money.
> I'm told that covered-call ETFs generally underperform (in addition to being inefficient)
I haven't looked into covered-call ETFs, but my prior is strategy ETFs are bullshit even when the underlying strategy may not be.
> "generating income" is best accomplished by just selling shares as needed
It works as long as you understand you're selling the options below their expected value (EV). It's closer to EV than an option buyer, on average. But the price you get will always represent less reward for risk than my option pricers running on microwave-linked FPGAs a few feet from servers in New Jersey and Chicago can bid and offer.
If that works for you--if the benefits of income or whatever outweigh that theoretical cost--you can do it sensibly. If you're selling puts to enhance your returns, you're probably going to, at the very least, lose your accumulated gains at some point.
TFA says "bought put options". One option (either PUT or CALL) is typically 100x the shares (but mini lots of 10x exists or at least did exist at some point).
So he bought (he's long on the PUTs) 10 000 PUTs on NVDA and 50 000 PUTs on PLTR. I don't know at which expiration dates nor at which strikes.
A PUT option can be either a bet (like in TFA) that an underlying shall go down below a certain price before a certain date of it can be an hedge when you own the stock, believe it could go up some more, but also want to be protected should it crash. Now of course hedging has a cost and it's not cheap: an option is an insurance. Even the terminology is the same: the buyer pays a premium and the seller (i.e. the one selling the insurance) collects that premium.
Now if you want to learn about full-on degenerate gambling, these last years there's been an explosion in "0DTE": options with zero day to expiration. Because they're 0DTE, there's very little "extrinsic" value in these. So it's a "cheap" way to get basically 100x leverage (either short or long).
Here's a small documentary of 5 minutes about 0DTEs:
I vouched for your post because the information is correct as far as I can discern. Perhaps others felt that you didn't warn strongly enough against engaging in such "full-on degenerate gambling"?
But the risk profile of options depends on more than date to expiration. Of course the strike prices matter, as well as the rest of your portfolio. The real "degenerate gamblers" are taking that leverage without compensating for it. But for example, holding something with 100x effective leverage can be balanced out by only putting 1% of your portfolio there and keeping the rest in cash. (This will generally be inefficient and there's a high chance you won't do as well as just holding the underlying.)
Burry was right about a scam. AI is not a scam. His short positions could simply be a conviction on rate of growth. If he was truly shorting it into collapse, then I'd say he's misguided here.
There are also other factors that affect Nvidia. Any move on Taiwan can collapse Nvidia's price down to zero. Hyperscalers can also shift orders over to AMD, Intel, ARM and Broadcom. This is inevitable, but you can't be too early with this.
Lastly. I don't know how technical Burry is. If you showed him LLM tech in 2017, would he have recognized it? There are things about this tech that he may not even recognize even if you showed it to him. You can literally show some people full generated video and they still wouldn't get how much compute it takes to do that.
Finally, the world is not just a giant Tulip bubble. There's actually trillions of dollars moving around every day and people innovate and consume. It's not just a giant Ponzi scheme waiting to collapse.
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As for Palantir, as many have mentioned, I would not consider shorting Palantir until year three of this administration. Palantir may lose favoritism with the next administration. Maybe. As we witnessed with the MAG7 CEOs, these people are prepared to change their entire value set to win the business of those in power.
> If he was truly shorting it into collapse, then I'd say he's misguided here.
He's not shorting this time. He has put options. This is a "short position" i.e. one that behaves inversely to the stock price, but his downside is limited (at the expense that he pays the full downside up front, and can lose money even if the stock goes down, if it doesn't go down by enough).
TFA says the options are on "roughly 1 million NVDA shares worth $187 million", implying NVDA was around $187 at the time of acquisition. That more or less tracks with the September 26 close, and this was apparently disclosed in a September 30 filing. NVDA is currently above $200. Similarly, he would have options on PLTR bought when that was also somewhere around $182 (roughly matching the September 30 close); even with today's crash, the stock is hovering around $190 as I write this.
So depending on the duration of the options there's a pretty decent chance he's going to lose money, and depending on the strike price it might well be the entire premium. As far as I can tell, neither of these is disclosed in the filing.
Putting aside that he's using puts (which caps the downside), with a classical short sell you don't need the current value of the stock liquid, but typically some percentage. That represents how much the stock can go up before you get the margin call. A short position is fundamentally unlike a long one, in that the future price movement of the underlying is bounded below at $0 but not bounded above.
The sources I can readily find put Burry's current net worth in the neighbourhood of $300 million. Depending on the regulations, he probably actually could put his entire life savings into a short of this magnitude. Of course, that's sort of like having your entire 401(k) in a -4x levered ETF, even worse because it's on individual stocks.
The filing doesn't appear to disclose strike prices or expiration dates. But my guess is that he loaded up on very cheap puts (low strike price) to hedge against the apocalypse (low probability of winning big to cover losses from everything else; high probability of just paying some insurance money). The same form shows bullish positions in other sectors — health care, finance and energy, as well as some corporate bonds. Given what the portfolio in the filing looks like overall, it's hard for me to imagine him being willing to risk more than a few million on this.
A bet against Nvidia is smart. A bet against Palantir is not. Palantir has become deeply integrated into the surveillance states of America, and won't be going anywhere anytime soon.
Palantir is trading at 80x revenue (NTM), whereas Nvidia is only trading at 19x revenue (NTM).
Both companies are growing revenue at a similar rate (~50% YoY), and Nvidia has a higher net margin, however Palantir's share price is up 717% over 18 months, whereas Nvidia is only up 124%.
It's hard to argue Palantir's valuation reflects its fundamentals, even if you believe Palantir will be benefit from lucrative government contracts for years to come.
Buying companies at 80x revenue has not historically been a great way to make money, unless they're growing revenue at several hundred percent per year.
But it has an unreasonable P/E ratio. The price is simply wrong.
It doesn't matter if it's the best firm ever and will get its dividends forever. You still calculate reasonably.
People say this kind of thing about Tesla as well, and Tesla has been stuck as a slightly-smaller-than-Mercedes-Benz sized firm for years and will stay like that forever, or even shrink relative to MB.
NVIDIA has a much more reasonable P/E ratio, even though it is of course very high.
Given that the market has moved so strongly away from dividends in favour of stock buybacks and other reinvestment (i.e. the successful companies are now much more often "growth" companies rather than "value" companies), and given e.g. Buffett's wisdom about total return, I don't know that traditional rules of thumb about P/E make sense any more.
They must be referring the the value of the shares the contracts represent?
There is enough bullish momentum that a trade of this size can actually be placed (of course in chunks).
Puts are calls and calls are puts [1]. On a certain level, all options of a given expiry and underlying are shadows of the same object.
[1] https://en.wikipedia.org/wiki/Put%E2%80%93call_parity
He may be. We may also only be seeing parts of the trade.
FWIG you can't actually see what premium was paid on an option unless the buyer chooses to disclose that themselves.
Nor the strike or tenor. (Options are more thinly traded than stocks. This confidentiality is practical.)
edit: smallmancontrov below pointed out that I wrote 'purchasing puts' was long, when I meant to write 'purchasing calls'
Glad to see someone say it. A lot of people have a hypothesis about the market, but fail to do the follow through to see if the market has already priced that in. The real aim should be to see when your model (mental or mathematical) prices things differently than the market.
In this case, it's actually quite reasonable to believe that the market has over priced the risk no matter how "sure" anyone is that these companies are over valued. It's entirely reasonable to pay for an option that you think reflects an unlikely scenario, but you also believe is mispriced notably by the market.
The relevant Greeks are delta, gamma and vega.
If your bet pays off, the price of the stock will decrease. Delta predicts how your option will increase in value with that; gamma if that relationship will accelerate or buffer. Vega, meanwhile, informs that the price suddenly crashing is volatility, which increases the value of your options.
Succinctly, if you are betting on a crash, options offer advantages. (And if the market, but not your company, gets bailed out, vega could put you middlingly in the black.)
Former options market maker here. We have insufficient data to conclude that.
I also happen to have experience unwinding correlation books after their originators shat the bed. Predicting a crisis is hard. Predicting correlations in a crisis for esoteric assets is almost impossible.
Burry wanted to bet on specific overvalued stocks. Not a general market crash. For that, puts are probably the best tool if the expectation is a sharp correction followed by, in all likelihood, a Trump put.
Leverage, margin risk and stock-borrow risk. (The last refers to the folks who lent you the shares recalling them inconveniently.)
This risk can be hedged with futures and options.
Sometimes you just want simple leverage, which the puts can provide.
PS. Burry infamously made several more bets after the "big short", bets that misfired. That is, his record is far from being 100% right.
By close though the market they may well all end higher. We seem to live in a meme economy.
To put another way, there's a lot of "potential energy" being built up in the markets right now. That doesn't necessarily mean they'll pop like a bubble - but there's really no precedent for them to continue rising.
General handwavy statements like "there's a bubble" aren't worth paying attention to. Ones with specific timelines attached to it (like the one above, or the article we're commenting on), are worth listening to a bit more, but unless they have the funds to back it up (like Michael Burry has put down here), it's still hot air.
I’m not sure what timeline to place on that but there has to be a floor for how bad it can get for the regular man.
Shit is just expensive. Young people can’t buy houses, good jobs are drying up, and inflation isn’t stopping.
https://fred.stlouisfed.org/series/MEHOINUSA672N
I don't know what the disconnect is with that chart and people's observations. Is that chart controlling for number of incomes and hours worked? If a household income increases by 20% because the members are working a combined 80% more hours that's not great. Category differences in inflation might be another factor. Sure TVs and other niceties are a lot cheaper, but essentials like housing and medical care eat up a huge portion of most budgets.
Also, most US households are homeowners, which means housing prices going up increases their (imputed) income.
> Is that chart controlling for number of incomes and hours worked?
Why should it? It's bad practice to control for random things - that gets you collider bias.
But see:
https://fred.stlouisfed.org/graph/?g=cWvT
https://fred.stlouisfed.org/series/LNS11300060
The disconnect is that CPI consistently significantly underestimates inflation as experienced by real people.
You may be thinking of Shadowstats, which is run by a crank who just takes the official numbers and adds a number he made up to them.
I don't know why cranks always think inflation is secretly higher. Deflation is a lot worse than inflation, so if you're a doomer, believing in deflation would be more effective.
The problem is that the error integrates over time, which IMHO is why graphs like that seem to suggest our standard of living is higher than ever... when a conversation with anyone at a local bus stop will tell you the exact opposite.
Is there someone with a better record then?
With that said, Burry is often credited for "Calling 18 of the past 2 recessions". Even a broken clock....
The powers that be have too much invested in the market continuing to move up, you are basically betting that Trump, a bunch of billionaires and the FED are going to let the market crash to curb inflation and income inequality. That feels like a bad bet to me.
By their very nature the markets can overwhelm any desire to "[not] let the market crash]"
The stock market isn't that important (though Trump does care about it). It's the bond market that everyone pays attention to when it stops working.
In a sense, stock market crashes are good for young people because you can buy stocks cheaper. In practice this isn't true because too many people are in debt and you get a balance sheet recession.
This is an argument against a market wide short bet. The Fed could raise the market while Nvidia still loses its premium.
The larger risk is political proximity, particularly with Palantir.
Powell's 4-year term ends January 31, 2026. Whether he is reconfirmed by the Senate for another term is an open question.
[1] https://www.congress.gov/crs-product/R48233
[2] https://en.wikipedia.org/wiki/Jerome_Powell#Federal_Reserve_...
Maybe it makes sense based on the dynamic of the Party needing to run through scapegoats? One could possibly see that Palantir is about to be thrown under the bus, but only connected insiders will know who its exact replacement will be? Personally I don't see signs of Palantir being close to the chopping block though.
The Nvidia trade is a rounding error compared to Palantir (which looks a bit oversized given it is 1/400th of the entire market cap)
As far as I can see, shorting Thiel is shorting Israel at the moment. Don't do it while Trump is in Cabinet and pressuring Tel Aviv to pardon Bibi.
NVDA on the other hand ...
What are you going to really do about something that posts 40B+ in revenue every quarter? Okay, you can short it I suppose. You'd have to time it with the expected drop off in AI compute spend, which means if you have a history of being early (which Burry does), you will lose.
Availability heuristic [1].
Flat earthers and folks deep in their small-country national politics do the same thing, overestimating the causal weight of the thing they’re obsessing about to any effect.
The useful takeaway is to recognize when you do it in smaller doses. What’s the first explanation you tend to have a hunch for explaining phenomena which are too diverse to be reasonably explained by a single factor.
[1] https://en.wikipedia.org/wiki/Availability_heuristic
https://edition.cnn.com/2023/08/15/investing/michael-burry-s...
>Traders following the investments disclosed by Scion’s over the last 3 years (between May of 2020 and May 2023) would have made annualized returns of 56% according to an analysis by Sure Dividend
Seems like Scion Capital could have just disclosed winning trades, that they may or may not have made?
How many bad predictions does he need to make before people stop caring what he has to say?
tl;dr he's a perma bear.
I actually don't think he's wrong, but one thing I've learned is that it's not enough to recognize a bubble. Almost everyone sees the markets are, as they say, frothy. But you need to see if there's a needle nearby. Without that you're just trying to get lucky.
Puts especially are really hard because they expire. They limit your loss compared to shorts, but you need to time it perfectly.
He’s making calls that things should crash but somehow, here we are.
people need basic options education..
If everyone followed your advice no one would ever do anything, as we all begin somewhere, something that should OK.
Of course, don't do million dollar trades when you begin, but we shouldn't push back on people wanting to learn, feels very backwards compared to hacker ethos.
Leverage can be a fearful thing.
Totally! But also keep in mind this :)
https://www.explainxkcd.com/wiki/index.php/1570:_Engineer_Sy...
That, and because snarky answers get more imaginary internet points than helpful ones.
Since when is this a problem? For gods sake, let people fuck up and harm themselves if they're stupid enough to take the risks, or not.
I think it's fine to say "Remember, this is risky because of A, B and C, but here's how to do it anyways..." but straight up "If you have to ask, you shouldn't" seems so backwards and almost mean, especially when we talk about money which is mostly "easy come, easy go". Let the fool be parted with their money if that's what they want :)
https://www.investopedia.com/ask/answers/06/sellingoptions.a...
You either sell the stock short or buy puts.
is my understanding right?
I make a PUT option on a stock for a price. This price is usually lower than the current market price of the stock.
1.When I do that, the premium amount is to be paid by me when i make the PUT option or I get paid while making the PUT option.
2. Do I have to pay upfront money before hand, while making the PUT option?
3. Is there a deadline for my PUT option. For example, if it doesn't happen, what form of loss do I experience?
If you sell a PUT, your exposure is much greater; you're the one who has to pay up if the option ends up in the money.
The deadline is the date of the option.
If you do lose money, it's a capital loss (tax benefit) and vice versa for capital gains.
A put option represents a belief that the price will fall, which makes "right to sell the stock" valuable. Similarly, a call option represents a belief that the price will rise. Both can be bought and sold; you do not "make" them but rather trade in them, just as you would in stock. But the relationship between the stock price and the result from an option is not linear; selling a put and buying a call are both nominally "long" the stock, but are not equivalent.[0]
When you buy an option, you are always immediately out for the cost of the option itself (the "premium"). This is separate from the strike price. It's the market's assessment of how much your "right to sell later" is worth, in itself. By doing this, you are speculating that you can recover that money later, based on how the stock performs. (Depending on your strategy, this can involve buying or short-selling the "underlying" stock, as well as other options.)
So if you buy a put, you pay money (the premium) up front, and you potentially just lose that money completely. Sane options strategies take your entire portfolio into account, and use options to hedge the risk profile of the rest of the profile (rather than trying to use the rest of the profile to justify taking on risk using options).
----
Some details, and further exploration.
Options represent essentially zero-sum speculation on top of the actual price movement. For example, holding everything else constant, a call option increases in value as the price of the underlying increases (the right to buy stock at a fixed price becomes worth more, when the stock is worth more). When a company does well, everyone who holds the actual stock shares in the company's good fortune; but the profit of call holders comes at the expense of those who sold (or "wrote") those calls.
The option is priced according to market expectations of risk (how likely is it that the stock's price will fall below the chosen mark?), and according to duration (the longer you reserve the right to exercise the option, the more likely it is that you'll get a profitable opportunity; therefore, the more valuable and thus expensive the option is). For long-term options (especially now that interest rates are non-trivial) there's a second meaningful duration factor: buying an option comes with the opportunity cost of not holding cash (or treasury bonds) for that period, and that also has to be priced in.
"American" options give you the right to exercise at any point before the deadline; "European" options only allow you to exercise at the deadline. This is also priced in; having more flexibility is worth more.
If you have chosen well, the market price for the stock goes down by a lot. This allows you to profit when you exercise the option.
If you have chosen poorly, you never get the opportunity to profit. Your options "expire worthless"; an option to sell at a point that has already passed has no value. You have been left holding the bag.
In between, you might exercise in a way that recovers only part of the premium you paid.
Much riskier is to sell options against securities you don't hold. (You will likely be legally barred from attempting this at all, and even wealthy experienced traders will be required to hold some percentage of the security value that their options represent.) You are hoping that the option expires worthless, so that you simply claim its value uninhibited. If it doesn't, you may be "assigned" i.e. legally on the hook for someone else's exercise of the option. If you sold a put, you may be forced to pay an inflated price for a stock that crashed. If you sold a call, you may be forced to acquire stock in order to sell it at a discount in order to fulfill your option. The potential loss for selling a put typically far exceeds the maximum potential profit; the potential loss for selling a naked call is unlimited (as we suppose the stock's value can go to infinity).
But if your sale of a call is "covered", or your sale of a put is "cash secured", this means you fully own the security (underlying stock, or liquid assets respectively) corresponding to the option. The cash secured put still incurs the risk of wiping out your entire cash supply, much as if you'd simply bought 100 shares directly, and it puts a hard limit on your upside. But it lets you profit from the stock without actually holding it.
Given sensibly chosen strike prices, covered calls actually end up with a similar risk/benefit profile. As the stock goes to zero, all you end up with is the option premium, because you were holding the stock. If the stock does well, your net profit is limited to the option premium, because the profit from holding the stock cancels out the liability of the option. (Equivalently: you are required to sell the stock at the strike price, but you already have that stock; no matter how high the underlying stock value gets, you can only claim the strike price.)
[0]: Doing both gives risk exposure roughly equivalent to holding the stock, without actually buying it. This is called a "synthetic long". As you can imagine, that is effectively unlimited leverage in itself, and if you attempt it you will be required to hold a significant amount of cash to limit your leverage, and jump through a lot of regulatory hoops to prove both your competence and solvency. I didn't mention this at the start, because you need the details to understand it.
https://www.schwab.com/learn/story/shorting-stocks-your-inve...
https://www.fidelity.com/viewpoints/active-investor/selling-...
Note: you pay overnight swap fees or similar for holding a position. "The market can stay irrational longer than you can stay solvent."
If you are having to ask an LLM how to do it, I strongly suggest NOT starting with shorting.
Ask about Put options, which is what Burry is doing here — not even Burry is shorting for this situation.
I'm no expert trader, but the potential losses for shorting are unlimited. You borrow X shares of a stock, and will have to repay your loan in that stock, whatever it costs. If the trade goes against you, you will get a margin call and will need to (re-)fill your account with whatever funds are necessary to pay that amount, or all your other holdings and that position will get sold automatically at whatever that loss amount is. Situations called a "Short Squeeze" arise not infrequently, and even though they are temporary, they can cause a stock price to skyrocket, specifically because so many people are shorting it, and everyone needs to buy to fill their short positions & margin calls. The fact that the price soon falls again helps you not one bit. Plus, the maximum profit is limited to the value of the short. E.g., you short the stock at $100/share, if the company goes bankrupt, you can repay the shares for $zero, making $100/share; but you could lose $1000/share if it goes up 10x.
In contrast, purchasing Put options, the right to sell the stock at a certain price, limits your loss to the cost of the Put options — if your idea turns out to be no good, it just fails and expires worthless.
Here's some MUCH better information:
https://www.investopedia.com/terms/l/long_put.asp
Former options market maker here. Please don’t buy options as a retail investor. (Maybe write to generate income.)
I'm told that covered-call ETFs generally underperform (in addition to being inefficient) and "generating income" is best accomplished by just selling shares as needed.
Options are always overpriced. They're fundamentally an insurance product. You should expect to lose money when buying insurance. If you're hedging, you should expect to lose on your options leg. Same as with any insurance product.
Options are governed by tight mathematical relationships between each other and with their underlyings. These can be atomically arbitraged, i.e. you don't need someone else to believe your thesis to make money. As a retail investor, you are on the other side of a system designed to efficiently price and reprice options to ensure the dealer doesn't lose money.
> I'm told that covered-call ETFs generally underperform (in addition to being inefficient)
I haven't looked into covered-call ETFs, but my prior is strategy ETFs are bullshit even when the underlying strategy may not be.
> "generating income" is best accomplished by just selling shares as needed
Yes. (Or borrowing against them.)
It works as long as you understand you're selling the options below their expected value (EV). It's closer to EV than an option buyer, on average. But the price you get will always represent less reward for risk than my option pricers running on microwave-linked FPGAs a few feet from servers in New Jersey and Chicago can bid and offer.
If that works for you--if the benefits of income or whatever outweigh that theoretical cost--you can do it sensibly. If you're selling puts to enhance your returns, you're probably going to, at the very least, lose your accumulated gains at some point.
I mean, lets say I evaluate a company, and I know what its worth is. Then I put a bid.
So he bought (he's long on the PUTs) 10 000 PUTs on NVDA and 50 000 PUTs on PLTR. I don't know at which expiration dates nor at which strikes.
A PUT option can be either a bet (like in TFA) that an underlying shall go down below a certain price before a certain date of it can be an hedge when you own the stock, believe it could go up some more, but also want to be protected should it crash. Now of course hedging has a cost and it's not cheap: an option is an insurance. Even the terminology is the same: the buyer pays a premium and the seller (i.e. the one selling the insurance) collects that premium.
Now if you want to learn about full-on degenerate gambling, these last years there's been an explosion in "0DTE": options with zero day to expiration. Because they're 0DTE, there's very little "extrinsic" value in these. So it's a "cheap" way to get basically 100x leverage (either short or long).
Here's a small documentary of 5 minutes about 0DTEs:
https://youtu.be/5atTocDOTpY
But the risk profile of options depends on more than date to expiration. Of course the strike prices matter, as well as the rest of your portfolio. The real "degenerate gamblers" are taking that leverage without compensating for it. But for example, holding something with 100x effective leverage can be balanced out by only putting 1% of your portfolio there and keeping the rest in cash. (This will generally be inefficient and there's a high chance you won't do as well as just holding the underlying.)
There are also other factors that affect Nvidia. Any move on Taiwan can collapse Nvidia's price down to zero. Hyperscalers can also shift orders over to AMD, Intel, ARM and Broadcom. This is inevitable, but you can't be too early with this.
Lastly. I don't know how technical Burry is. If you showed him LLM tech in 2017, would he have recognized it? There are things about this tech that he may not even recognize even if you showed it to him. You can literally show some people full generated video and they still wouldn't get how much compute it takes to do that.
Finally, the world is not just a giant Tulip bubble. There's actually trillions of dollars moving around every day and people innovate and consume. It's not just a giant Ponzi scheme waiting to collapse.
--
As for Palantir, as many have mentioned, I would not consider shorting Palantir until year three of this administration. Palantir may lose favoritism with the next administration. Maybe. As we witnessed with the MAG7 CEOs, these people are prepared to change their entire value set to win the business of those in power.
He's not shorting this time. He has put options. This is a "short position" i.e. one that behaves inversely to the stock price, but his downside is limited (at the expense that he pays the full downside up front, and can lose money even if the stock goes down, if it doesn't go down by enough).
TFA says the options are on "roughly 1 million NVDA shares worth $187 million", implying NVDA was around $187 at the time of acquisition. That more or less tracks with the September 26 close, and this was apparently disclosed in a September 30 filing. NVDA is currently above $200. Similarly, he would have options on PLTR bought when that was also somewhere around $182 (roughly matching the September 30 close); even with today's crash, the stock is hovering around $190 as I write this.
So depending on the duration of the options there's a pretty decent chance he's going to lose money, and depending on the strike price it might well be the entire premium. As far as I can tell, neither of these is disclosed in the filing.
AI is not the only way to address challenge that it aims to solve.
That margin call could obliterate him.
Also, this is not an argument in favor of Nvidia or Palantir.
The sources I can readily find put Burry's current net worth in the neighbourhood of $300 million. Depending on the regulations, he probably actually could put his entire life savings into a short of this magnitude. Of course, that's sort of like having your entire 401(k) in a -4x levered ETF, even worse because it's on individual stocks.
The filing doesn't appear to disclose strike prices or expiration dates. But my guess is that he loaded up on very cheap puts (low strike price) to hedge against the apocalypse (low probability of winning big to cover losses from everything else; high probability of just paying some insurance money). The same form shows bullish positions in other sectors — health care, finance and energy, as well as some corporate bonds. Given what the portfolio in the filing looks like overall, it's hard for me to imagine him being willing to risk more than a few million on this.
Both companies are growing revenue at a similar rate (~50% YoY), and Nvidia has a higher net margin, however Palantir's share price is up 717% over 18 months, whereas Nvidia is only up 124%.
It's hard to argue Palantir's valuation reflects its fundamentals, even if you believe Palantir will be benefit from lucrative government contracts for years to come.
Buying companies at 80x revenue has not historically been a great way to make money, unless they're growing revenue at several hundred percent per year.
It doesn't matter if it's the best firm ever and will get its dividends forever. You still calculate reasonably.
People say this kind of thing about Tesla as well, and Tesla has been stuck as a slightly-smaller-than-Mercedes-Benz sized firm for years and will stay like that forever, or even shrink relative to MB.
NVIDIA has a much more reasonable P/E ratio, even though it is of course very high.
This isn't a matter of rules of thumb. This is what's required to have prices that do not create an arbitrage opportunity.
I'm old enough to remember it being impossible to imagine a world without the USSR in it.