> $530 million bet
> long puts against 800,100 shares
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.
> long puts against 800,100 shares
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.
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.
For example, a $450 put for September 17th 2021 would cost about $16.70 per share:
https://finance.yahoo.com/quote/TSLA/options?strike=450&stra...
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.
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.
I just bought a 2-month expiry put option at a strike of $10k on your car.
Two month later, I check the resell value for your car.
If it's more than $10k, let's say 13, I buy yours at 10 and resell it at 13K. I won 3-1=$2k
If it's less that $10k, I just pass, I lost $1k.
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.
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.
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."