I find the title misleading. Unless I misunderstand, Michael Burry has not actually put $530M of his money at risk. He's made a much smaller, leveraged bet. $530M is just the notional value.
So how would you go about making an educated reverse engineering claim on the stake at risk without knowing his other legs nor expiry dates? Is it even possible? How about a wide range?
He bought 8001 put options on some undisclosed date at an undisclosed strike date and price. You can take a look at the options chain for TSLA to get an idea.
For example, a $450 put for September 17th 2021 would cost about $16.70 per share:
One option counts for 100 shares, so that would be a (8001 * 16.70 * 100) 13.36 million dollar bet. Suppose that TSLA is worth only $400 on that date, with your right to sell at $450 you'd be in the money for 40 million dollars, or roughly $26 million in profits. If TSLA is worth $450 or more on that date, your options expire worthless.
> As of March 31, Burry owned 8,001 put contracts, with unknown value, strike price, or expiry, according to the filing.
You can't figure out his position with this information.
For example, you could buy very, very out-of-the-money puts for a penny. (Your bet would basically be: TSLA loses 95% of it's value in the next week.) My total value at risk for this bet (of 8,001 put contracts) would be $80.
*Small correction - the minimum value of 8000 put contracts would be $8000, since one put at a price of $.01 actually costs $1 and controls 100 shares of stock (the price is price per share)
Can someone ELI5 how this works to those of us who only buy and sell things? I've looked up the definitions, but I'm curious about the purposes and practical risk/reward scenarios of this particular sort of bet.
When you buy a “put” you are entering into a contract that gives you the right, but not the obligation, to sell X number of shares of Acme Class A common stock for $Y/share on (or sometimes within) a specific date.
So let’s say Acme Class A is currently trading at $50/share. If you think, for whatever reason, Acme Class A common stock will be trading at $1 next week you might want to buy a put that lets you sell 100,000 shares for $10/share. If the price of Acme Class A stays the same, you would never exercise the option to sell because you’d lose money - why would you sell Acme Class A for $10/share when you could sell it on the open market for $50/share? But if you’re right, and Acme Class A is trading at $1/share, you would then of course want to sell as many shares as possible at the $10/share rate. So you’d go on the open market, buy yourself 100,000 shares for $100,000, then turn right around and exercise your option to sell those shares for $1,000,000.
So the only money at risk is the cost of the contract itself because you don’t have to actually buy the shares until you decide whether you want to exercise the option to sell them.
If you want a put contract that allows you the option to sell 100,000 shares of TSLA for $0.01/share tomorrow it wouldn’t cost much because it’s highly unlikely you’d exercise the option and so, for the person on the other side of the agreement, it would basically be free money. When there’s more uncertainty then the cost of buying the contract is higher because the person on the other side is taking a risk that they’ll be stuck buying a bunch of securities at a price much higher than what they’re actually worth.
TLDR: when you buy a put contract you’re essentially paying money to someone to lock in a price.
So, if I understand it correctly, buying "puts" can be a cheap way to generate publicity around some stocks? That is, I could cheaply buy puts for half a billion dollars' worth of TSLA that are so ridiculous it's obvious I won't be exercising them, and this would give me a "500M bet against Tesla" headline?
Great explanation, thanks. Do you happen to know far out these contract dates tend to be? Is it standardized, or a thing you negotiate (at normal levels and at giant $0.5B levels like in the article)?
I asked because I figured a trading app would give me a couple standard options (pun intended), but I'm curious about how this works for professionals. I figured it would be clear that I'm not asking whether you typically negotiate a $0.5B contract on robinhood.
Options are time-limited and expire so you're betting that it goes up or down BEFORE a certain date.
You can buy very cheap out of the money options at small fractions of the cost of the shares by making bets that TSLA will drop hard in the next year while the market thinks that in that timeframe it will not.
Most of the time you lose money doing this.
Time it right, though and you can make 10x returns, but you have to be right and the rest of the market needs to be wrong, which is often unlikely.
But even if you're right in the long-term you need to also get it right in the short-term.
I don't think I'd be betting against this market right now, there's no guessing how irrational we'll wind up getting. Post-pandemic I would guess we'll have even more of an irrational bubble around back-to-normal, and a rising tide lifts all the boats.
A put is a option contract that gives its holder the right to sell a share at a certain price (strike) within a certain time (maturity for American options, European options can only be exercised at maturity). If you buy a put of strike 100 and a stock is at 90 you can exercise it thus selling the stock at 100 which is higher than its actual price.
So when you buy a put you are betting that the stock is going to go down. Each put usually gives you right to sell 100 shares, and since you can buy/sell the contract itself, you can easily get leverage when compared to actually trading the shares.
Without knowing what the strike prices and how much he paid for those contracts you can't really determine how much he is going to gain/lose. His gain is capped though as TSLA cannot go below 0.
Just like "ask me anything" does not necessarily mean anything, it's an expression at this point.
The ELI5 subreddit describes it in its rules as such:
"Rule 4: Explain for Laypeople
As mentioned in the mission statement, ELI5 is not meant for literal 5-year-olds. Your explanation should be appropriate for laypeople. That is, people who are not professionals in that area. For example, a question about rocket science should be understandable by people who are not rocket scientists."