To be clear, Michael Burry didn't short Tesla, he bought put options, which gives him the right but not the obligation to sell Tesla stock for a certain price, on a certain date.
If the bet works against him, his options expire worthless. This puts an upper limit on his losses.
If you have an actual short position, your potential losses are unlimited.
Short positions (for some reason) are not on the 13F.
So he could be long TSLA and have purchased put options as a hedge or any number of other strategies.
https://www.sec.gov/Archives/edgar/data/1649339/000156761921...
I'm sure there's other intricacies in short vs buy a put, but I don't think you can infer too much from the choice without knowing a lot more. I think all you could say is that he's bearish on the stock in the short term.
I could be wrong though so I would love to hear other interpretations or whether there's some liability apart from your margin in a naked short.
Similarly, with a short position, you'll be paying a borrow fee which will vary over time based on short interest.
If you sell a put option, then you have the obligation to sell in the future at the fixed price, regardless of the market price at the time. However, many of these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options. So if the stock goes above the strike price, they have the option of selling the shares the already own. Thus, the seller is not on the hook for infinite losses. They merely trade the potential for unlimited gains in return for a fee.
I've always thought it would be fun to get into options by regular, automated, selling of covered put options. You get paid by speculators for underwriting their speculating. But... options pricing models are like real academic. It's like a real job.
When you sell a put, your obligation is to pay the strike to buy someone else's shares.
For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts.
A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.
A covered call is where you sell options backed by long shares. A covered put is backed by short shares. A common way of selling puts without shorting the underlying stock is just having enough cash on hand to buy the underlying asset if the option is exercised.
And yeah, some small investors do claim to make decent income primarily writing options. The basic idea is that if you can eke out like 0.5% a week on average, you can get around 25% annual returns. I've been looking into trying to automate some basic strategies, but it's rather daunting just getting started in automated trading. Figuring out how to just get the data you need for implementing a strategy is a pretty big hurdle, for instance.
Surely your liability is to the shares you borrowed, not the fraction your account has to meet margin requirements? If not, why would a broker ever let you short on a margin account under the same rules as other margin?
Isn’t this a bit like saying that the potential upside of holding any stock is unlimited?
To use a slightly anomalous stock which hasn't split as an easy example, if you had shorted $BRK in 1980 when the price was $300, the potential upside was just 100%: In your best outcome, they go bankrupt and the most you earn is $300. Unfortunately for you, Berkshire Hathaway shares are now worth $430,000, so your $300 or 100% upside turned out to be a rounding error against the approximately -150000% loss.
Edit: The reverse is technically symmetrical, but the consequences make it work out differently for the markets and society. Yes, if you'd bought BRK in 1980 you'd have had a liability of $300 (your cash input could be worthless if they went bankrupt) and a potential upside of hundreds of thousands if it went to the moon.
The difference is that if you held the stock and it goes bankrupt, you're only liable for the amount that you put in. Worst case, you bet the farm and you're going to be washing dishes to put food on the table, but it's your loss to lose and your gain to win. If instead you bet the farm in a short position, you never had and will never have thousands of farms to bet in the first place; you're going to declare bankruptcy and someone else is going to have to pay for the bad bet you made. That effectively pushes the losses back on society but privatizes the gains.
However, if you lose $300 that you brought to the table, that's your problem, too bad for you. If you lose $430,000 when you only brought $300 to the table, that's beyond being just your problem, that's the system's problem.
A system which allows this situation to happen is fundamentally flawed, it's vulnerable to exploitation and collapse if this kind of behavior allowed to go on unchecked.
Those guys in finance and regulations have been here before we were born, they managed to cover most basic stuff by now.
If you have a stock you have to sell and there are no offers to buy on the books you can't offer to sell then keep raising the price, instead you would need to keep lowering the price. The price is either limited by what's on the books, or you need to wait an indeterminate amount of time for some one to buy at the price you are selling. During this time you are trying to sell your profit is decreasing (as you lower the price to get a buyer) and bounded by $0 (for a limited liability company).
So while it's true that if you hold a stock indefinitely the value you could get is unlimited with a short the value you could lose could be unlimited over a much shorter time frame.
[1] Whether you actually need to cover your shorts may be a matter of some debate if you look at the wild rumors around GME
This means with the cash it takes to buy 1 share you can short as many shares as someone will lend which can multiply your loss to more than you have.