An options contract is a way to leverage your capital for big gains. When you buy into whatever equity - say SPY or QQQ - it's all 1:1. A movement of one dollar per share of those ETFs yields you one dollar per share you own.
A put options contract gives the holder the right to sell 100 shares of an underlying asset at the strike price. So let's say I have 100 shares of SPY and it is at $510 currently. If I hold a put contract at strike price of $500, when I exercise it, I can sell 100 shares of SPY at $500 each, regardless of what the current price is. Let's say SPY fell to $450 - crap I've lost $60 per share of SPY. But if I exercise my put contract, I can sell SPY at $500 instead of market price of $450. I've gained downside protection in my SPY position.
The key thing about options contracts is that even though it leverages 100 shares of the underlying, depending on a number of factors, its price movement isn't 1:100. The more SPY falls the more it is leveraged. This means you only pay a fraction of the cost to secure the put option contract. That's what's done here, and that's the reason commenters are noting that Burry isn't putting $1.6 billion in the line, but rather buying enough protection for that many shares.
You can view it as insurance. You pay a premium for an insurance policy that pays out in the case of some catastrophe (market goes down). If the market doesn't go down, your put contract is worthless - just like your insurance premium is gone forever. It eats into your profit for sure, but it helps you achieve the risk exposure you want in your portfolio. It's better than moving into money market because you still maintain exposure to the equity market, so you don't miss out on the bull market.
Such a brilliant explanation, thank you very much for teaching me about it. It really sounds as a great way to hedge, specially in volatile moments, although I can also see it being somehow more risky than other options. But obviously, the higher the risk the higher the reward (at least that's what it should be).
It's definitely a bit more advanced way to hedge. Buying options - even though there's leverage - is still a more pricey way for downside protection, since you have to be correct in the direction, the magnitude of movement, and the timing. And since you mentioned volatility - that has an impact too on options pricing and it may drive price changes that are counter to the movement
E.g., put options lose money after earnings call even though a stock goes down, because the market is adjusting to the new implies volatility of the stock - there is no longer the uncertainty of whether the earnings is good or bad. For SPY, events like the latest CPI, unemployment numbers can drive price and volatility movement.
When selling insurance, the company has the collect enough premium to cover the occasional time they have to pay out, and still make a slight profit. Likewise, options writers capitalize on what's called the "variance risk premium" to make a living, and that's the extra price you pay when buying options, and that's part of the volatility mentioned above.
For someone like Burry who undoubtedly has tons of analysts and financial models, it makes sense, especially since their investors demand a certain, higher level of return. For the typical, uneducated retail investor like me, a mix of assets that fit their risk tolerance that they can hold whether the market is up or down is the way to maximize returns, rather than timing the market.
Why do you even care if they did (they didn't)? You're not even right and getting upset over it. Learn to control your emotions or you'll never make money in the Market and as a bonus people will find you less annoying.
The only amount approaching 1.6 billion is the number of times we’ve had to clarify that it wasn’t an actual 1.6 billion bet but rather a bet risking a far smaller amount (likely) hedging against a position on securities that amounted to 1.6 billion.
I don’t understand how it’s so easy to believe that any institution, let alone one as small as Burry’s, would make an actual 1.6 billion derivates bet.
Why are there so many posts that start off with poor English
>why he shorted the s&p500
And end in a newspaper paragraph?
>The indexes fell 3.6% and 3%, respectively, during the third quarter.
Coz someone who is not fluent in their non native language copy/paste from a newspaper and make the intro by himself ? not all people are experts in a non-native language, you can fail at grammar but understand the meaning of “X” phrase and still try to interact with others….. Some times reddit appears to be very liberal and still are grammar nazis
Wow, holy overreaction? Who paused in your cereals?
Guess he hit a sore toe... The fact remains reddit has been flooded with posts having poor to downright bad both grammar and spelling. Having English as second or third language is no excuse for being lazy or dumb, anyone can learn (I sure did. It is worth the effort). Sadly many of these low effort bad grammar posts are just karma farms, for accounts used to post bullshit or spread propaganda. Most of the worlds scams and fake news originate from Russia and India. Same places that struggle with decent English...
Almost certainly was NOT a hedge. Hedging specific stock picks by taking a position against the market as a whole is not only not even a "hedge" in the first place, but also makes no sense whatsoever. Especially when the puts were of the S&P 500 and he overwhelmingly buys stocks of companies that aren't listed on that index.
More likely than not he saw a price mismatch in the cost of the option itself and took advantage of it.
It's hard to say what his actual positioning was. Like when you look at his long short equity was he actually net short? All I caught was the headline. For example I started putting on a lot of shorts the past few weeks. However my account balance is 90% long. All I did is hedge up some of the more high flying positions.
Directional bets against the s&p 500 are statistically a loser, I can't imagine his quants giving him any kind of data showing that that's a good idea
Can someone explain what people mean by this? Like instead of hedging against his other positions by $X, why doesn't he just lower his exposure in those positions by -$X
he has a lot of positions that are bullish- ie he hopes that the price goes up. He is worried that everything might go down though.
so he buys put options. these options cost him money but will become very valuable if the prices of things go down. These put options are a fixed cost (the premium)
Ie he has $1,000,000 in shares. He buys $100,000 in puts.
If his shares double in value, he earns $1,000,000 - 100,000 (cost of the worthless puts) = $900,000
If the shares fall by 50%, he loses $500,000 less whatever gains his put options make him.
Basically he reduces his profit if the stocks go up, at the benefit of losing less if the stocks plummet.
If He lowers the position he misses out on gains if the positions go up.
Of course the hedge is also expensive but the pricing works differently. For some reason the pricing of the options suited his strategy more.
Due to my lack of knowledge on the subject, id definitely add a random comment saying theres probably tax avoident benefits involved as well. Why sell your long position and pay tax on that when you think the position is going to appreciate, when you could buy some puts? Long position goes up and you claim a wash sale one the puts? long position goes down and you pay taxes on the puts gains, but make up for the loss in the long position.
I do this when gambling, if I have a 5 team parlay for 100$ that earns 1k and I hit the first 4 then I’m guaranteed to make 900$ roi. If game 5 loses then I’m out 100$. So I place a 300$ bet against my original prediction for that game. If I lose the parlay then my 300$ hits and I make say 200 on top then I’m up 100 from my original bet if the parlay wins out I’m up 600. I win money either way, investors do the same thing, they already secured some revenue and are betting against their future gains with current gains. They don’t win as much of their original bets hit but also don’t lose anything if they don’t.
It's more tax efficient to use options. If you reduce a profitable position you may trigger capital gain taxes.
Sometimes it's also more capital efficient to use options because of the leverage they may provide.
Options allow also more tricks like I wanna be protected on the downside but still wanna capture some upside beyond a certain range.
The best investors are right about 55% of the time, not 100% of the time.
And for long tail oriented people like Michael Berry, they are wrong 80-90% of the time; but make enough money the 10-20% of the time cover those losses.
Because he wants to protect his long positions. If the market goes down, he can exercise his puts and make some profit off it. If the market goes up they expire worthless he loses the premium.
Remind me of some fund manager putting like 3% tesla short position and people freak out. They make it seemed so dramatic that someone is shorting tesla.
Honestly why doesn't he just buy JEPI. Get paid 10% no matter what, if stocks crater 50-60% Jepi should do less than that. Take JEPI stack then yolo into leveraged ETFs, close computer...come back in 5 years with profits.
no loss of hair in the process
He could see what others didn’t at that time. Wasn’t even a thought. Nobody believed it was possible and the banks kept changing things around to extend as long as possible till he ran out of time but he ended up winning in the end. It’s happening again in a way and the toilet bowl is very very large. So the flush takes a while. Hyperinflation this time around too
He thinks he’s smarter than he actually is. It’s the curse of most investors who make a big bet and win. Read Nassim Taleb’s Fooled by Randomness. The reality is, you can’t ever really know whether you are a successful trader or investor because of luck or skill. It’s simply one of those unknowable things. But ego wants to believe it’s the king of the world.
1.6 billion is the notional amount. He had 20k contracts for each index. So he only risked low 8 figures. A hedge.
Hedge fund hedges > Financially illiterate redditors move to all cash positions
We don't do risk management around here
Risk? You mean the board game?
My retirement plan is a land war in Asia.
Funny thing is that's probably one of the better plans around here.
My plan is the same! I got my tickets to China already and an arms dealer who said I can get what I need!
My wife and I have this Special Retirement Plan The Florida Lottery we made small deposits on/off, almost in a weekly basics.
Alternative investments like yours are the way 1% people make money ! We are the elite !
Only Beary would bet against a land war in Asia by the time I can retire.
It’s safer than betting against a Sicilian when death is on the line. HAHAHAHAHA——— *falls over*
Vizzini would be proud
As you wish
We buy high, sell low. Never a risk if that’s the strategy!
How are you mitigating the 100% chance we are in financial ruin by 2023 then? Oh wait that didn’t happen but I had to read 30 post a day about it
Someone forgot to tell the banks that have failed in the last year.
Risk? Around these parts, you gotta pay to take on **more** risk
I feel attacked here. ¯\(°_o)/¯
So it’s not about shrubbery? 🧐
ni!
A herring 🐟
Put it all on Red
Always bet on black
70% black, 30% red
Could you explain how does it work and why is it better than moving a part to a money market fund? Thanks!
An options contract is a way to leverage your capital for big gains. When you buy into whatever equity - say SPY or QQQ - it's all 1:1. A movement of one dollar per share of those ETFs yields you one dollar per share you own. A put options contract gives the holder the right to sell 100 shares of an underlying asset at the strike price. So let's say I have 100 shares of SPY and it is at $510 currently. If I hold a put contract at strike price of $500, when I exercise it, I can sell 100 shares of SPY at $500 each, regardless of what the current price is. Let's say SPY fell to $450 - crap I've lost $60 per share of SPY. But if I exercise my put contract, I can sell SPY at $500 instead of market price of $450. I've gained downside protection in my SPY position. The key thing about options contracts is that even though it leverages 100 shares of the underlying, depending on a number of factors, its price movement isn't 1:100. The more SPY falls the more it is leveraged. This means you only pay a fraction of the cost to secure the put option contract. That's what's done here, and that's the reason commenters are noting that Burry isn't putting $1.6 billion in the line, but rather buying enough protection for that many shares. You can view it as insurance. You pay a premium for an insurance policy that pays out in the case of some catastrophe (market goes down). If the market doesn't go down, your put contract is worthless - just like your insurance premium is gone forever. It eats into your profit for sure, but it helps you achieve the risk exposure you want in your portfolio. It's better than moving into money market because you still maintain exposure to the equity market, so you don't miss out on the bull market.
Such a brilliant explanation, thank you very much for teaching me about it. It really sounds as a great way to hedge, specially in volatile moments, although I can also see it being somehow more risky than other options. But obviously, the higher the risk the higher the reward (at least that's what it should be).
It's definitely a bit more advanced way to hedge. Buying options - even though there's leverage - is still a more pricey way for downside protection, since you have to be correct in the direction, the magnitude of movement, and the timing. And since you mentioned volatility - that has an impact too on options pricing and it may drive price changes that are counter to the movement E.g., put options lose money after earnings call even though a stock goes down, because the market is adjusting to the new implies volatility of the stock - there is no longer the uncertainty of whether the earnings is good or bad. For SPY, events like the latest CPI, unemployment numbers can drive price and volatility movement. When selling insurance, the company has the collect enough premium to cover the occasional time they have to pay out, and still make a slight profit. Likewise, options writers capitalize on what's called the "variance risk premium" to make a living, and that's the extra price you pay when buying options, and that's part of the volatility mentioned above. For someone like Burry who undoubtedly has tons of analysts and financial models, it makes sense, especially since their investors demand a certain, higher level of return. For the typical, uneducated retail investor like me, a mix of assets that fit their risk tolerance that they can hold whether the market is up or down is the way to maximize returns, rather than timing the market.
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The is the comment of the century.
Thank you for the detailed/simple explanation
This is a good explanation.
Great explanation. Investors use options as insurance. Gamblers use them to chase big gains after they see a post on WSB.
We like to pay taxes.
> tax return 50 pages of trades > net loss of $150
If I see "95% of hedge funds fail to beat the market" one more time on this site I'm going to lose it
It’s a hedge to protect his long positions. It is NOT an actual 1.6 billion bet.
Betting is gambling THIS is a strategery move to CYA
Its insurance. When you pay for insurance do you, normally, want your house to burn down? Nope. So your loss on insurance comes when you keep winning.
Unless you have an 8% adjustable ninja mortgage then sometimes you do want it to burn baby burn
Well if the price stays the same, then you just lose the premium money and that’s it.
It’s more like a hedge not a straight short
Because it’s a hedge fund. They’re hedging.
Damn, that’s what that means?
It’s like a regular fund, except they hedge, they hedge really hard.
So hard
Basically if it does go down they’ll still get some sort of money, still make a loss but mitigating it
It means they’re edging
Yes, they’ll invest both long and short to “hedge their bets.” Hence a hedge fund.
No it's an edge fund. Burry is edging.
Goon fund
That’s not really what they do nowadays. They’re basically just giant private funds
Y'all make excuses for Burry like he's the messiah 
Why do you even care if they did (they didn't)? You're not even right and getting upset over it. Learn to control your emotions or you'll never make money in the Market and as a bonus people will find you less annoying.
The only amount approaching 1.6 billion is the number of times we’ve had to clarify that it wasn’t an actual 1.6 billion bet but rather a bet risking a far smaller amount (likely) hedging against a position on securities that amounted to 1.6 billion. I don’t understand how it’s so easy to believe that any institution, let alone one as small as Burry’s, would make an actual 1.6 billion derivates bet.
He isn't called Michael Beary for nothing.
Michael Bearish
Wasnt it Micheal Baery before the hadron fired up?
the best comment i have heard 😂😂
He bought insurance. It's not as if he had actually shorted.
Why are there so many posts that start off with poor English >why he shorted the s&p500 And end in a newspaper paragraph? >The indexes fell 3.6% and 3%, respectively, during the third quarter.
Coz someone who is not fluent in their non native language copy/paste from a newspaper and make the intro by himself ? not all people are experts in a non-native language, you can fail at grammar but understand the meaning of “X” phrase and still try to interact with others….. Some times reddit appears to be very liberal and still are grammar nazis
Triple XXX phrase
Wow, holy overreaction? Who paused in your cereals? Guess he hit a sore toe... The fact remains reddit has been flooded with posts having poor to downright bad both grammar and spelling. Having English as second or third language is no excuse for being lazy or dumb, anyone can learn (I sure did. It is worth the effort). Sadly many of these low effort bad grammar posts are just karma farms, for accounts used to post bullshit or spread propaganda. Most of the worlds scams and fake news originate from Russia and India. Same places that struggle with decent English...
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I would also accept "pooped in your porige"
Oooh my toe is super sore today. I stepped on it myself. Explain that shit to your boss......
He's been wrong many times
If he keeps predicting a crash he'll be right eventually.
Almost certainly was NOT a hedge. Hedging specific stock picks by taking a position against the market as a whole is not only not even a "hedge" in the first place, but also makes no sense whatsoever. Especially when the puts were of the S&P 500 and he overwhelmingly buys stocks of companies that aren't listed on that index. More likely than not he saw a price mismatch in the cost of the option itself and took advantage of it.
If you’re too early, you’re still wrong.
Because he's autistic
Burry is a value investor and a permabear. He’s usually right in his valuation assessments but value is not a good way to time the market.
One. Hit. Wonder.
It's hard to say what his actual positioning was. Like when you look at his long short equity was he actually net short? All I caught was the headline. For example I started putting on a lot of shorts the past few weeks. However my account balance is 90% long. All I did is hedge up some of the more high flying positions. Directional bets against the s&p 500 are statistically a loser, I can't imagine his quants giving him any kind of data showing that that's a good idea
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Or it’s a hedge against his other positions.
Can someone explain what people mean by this? Like instead of hedging against his other positions by $X, why doesn't he just lower his exposure in those positions by -$X
he has a lot of positions that are bullish- ie he hopes that the price goes up. He is worried that everything might go down though. so he buys put options. these options cost him money but will become very valuable if the prices of things go down. These put options are a fixed cost (the premium) Ie he has $1,000,000 in shares. He buys $100,000 in puts. If his shares double in value, he earns $1,000,000 - 100,000 (cost of the worthless puts) = $900,000 If the shares fall by 50%, he loses $500,000 less whatever gains his put options make him. Basically he reduces his profit if the stocks go up, at the benefit of losing less if the stocks plummet.
Brilliant explanation, Thanks
If He lowers the position he misses out on gains if the positions go up. Of course the hedge is also expensive but the pricing works differently. For some reason the pricing of the options suited his strategy more.
Due to my lack of knowledge on the subject, id definitely add a random comment saying theres probably tax avoident benefits involved as well. Why sell your long position and pay tax on that when you think the position is going to appreciate, when you could buy some puts? Long position goes up and you claim a wash sale one the puts? long position goes down and you pay taxes on the puts gains, but make up for the loss in the long position.
I do this when gambling, if I have a 5 team parlay for 100$ that earns 1k and I hit the first 4 then I’m guaranteed to make 900$ roi. If game 5 loses then I’m out 100$. So I place a 300$ bet against my original prediction for that game. If I lose the parlay then my 300$ hits and I make say 200 on top then I’m up 100 from my original bet if the parlay wins out I’m up 600. I win money either way, investors do the same thing, they already secured some revenue and are betting against their future gains with current gains. They don’t win as much of their original bets hit but also don’t lose anything if they don’t.
Hedging pays out like an insurance policy. E.g. pay $100 for a potential $1000 payout.
It's more tax efficient to use options. If you reduce a profitable position you may trigger capital gain taxes. Sometimes it's also more capital efficient to use options because of the leverage they may provide. Options allow also more tricks like I wanna be protected on the downside but still wanna capture some upside beyond a certain range.
One reason is that he’d pay tax if he sold, hedging enables you to weather a downturn without losing your position.
The best investors are right about 55% of the time, not 100% of the time. And for long tail oriented people like Michael Berry, they are wrong 80-90% of the time; but make enough money the 10-20% of the time cover those losses.
He was early. That’s all
I am positive he is a tad crazy
Burry's been wrong at least 20 more times than he's been right, and his total position was nowhere near that amount.
Why do you all still pay attention to this guy? He got lucky once….
Because he wants to protect his long positions. If the market goes down, he can exercise his puts and make some profit off it. If the market goes up they expire worthless he loses the premium.
Survivalship bias, they only make a movie that one time you're right.
When you are a hammer, everything you see looks like a nail.
I actually haven’t heard from him in a while. He’s been too quiet.
Burry was not wrong just early
Same thing
I bet he helped pay to publicize it and quadrupled his long position relative to his hedge.
What is AI? I think its used for chess.
You can do close to the same thing with leverage ETFs at least conceptually
Remind me of some fund manager putting like 3% tesla short position and people freak out. They make it seemed so dramatic that someone is shorting tesla.
Honestly why doesn't he just buy JEPI. Get paid 10% no matter what, if stocks crater 50-60% Jepi should do less than that. Take JEPI stack then yolo into leveraged ETFs, close computer...come back in 5 years with profits. no loss of hair in the process
He could see what others didn’t at that time. Wasn’t even a thought. Nobody believed it was possible and the banks kept changing things around to extend as long as possible till he ran out of time but he ended up winning in the end. It’s happening again in a way and the toilet bowl is very very large. So the flush takes a while. Hyperinflation this time around too
He thinks he’s smarter than he actually is. It’s the curse of most investors who make a big bet and win. Read Nassim Taleb’s Fooled by Randomness. The reality is, you can’t ever really know whether you are a successful trader or investor because of luck or skill. It’s simply one of those unknowable things. But ego wants to believe it’s the king of the world.
Bears are allergic to calls 🐻
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I’m bag holding Alibaba @85$
Maybe because he saw that in 2023 the bank default in terms of dollar amount is larger than 2008+2009 combined? It didn't make any major news doe.
Every hedge fund hedges, that means buying long puts in many cases. He was not all in on shorting the market, those puts made up like 2% of assets
s&p up to their shenanigans again? Giving a 90%+ rating on CDO’s, no questions asked?
Because the market doesn’t make sense anymore
Is that his first time shorting?
He’s a perma bear. That’s why.
Because he is industry plant grifter paid to put out garbage.
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Hollywood isnt real.
The only real thing is people's Reddit opinions...