Michael Burry’s $1.6 Billion Drawdown Shows That Markets Can Remain Irrational Longer Than You Can Remain Solvent

EDITOR'S NOTE: In a resurgence of audacity, the enigmatic investor Michael Burry looks to be on the verge of blowing himself up a decade and a half after his infamous mortgage market feat. This time, the maverick has orchestrated a "big short" spectacle, placing a bold bet against the stock market. Yet, the dice roll hasn't been in his favor, with Burry's once-great gamble now standing in the red, a 42% dent in his fortune, as disclosed by the vigilant observer Gurgavin. With a mere $26.5 million thrown into the arena for a $1.6 billion showdown, Burry's tactics have thrust him into the eye of an enigmatic tempest, where strategy and outcome are a tangled, volatile dance. As the market watches on, it remains an electrifying question whether Burry's moves are those of a hedger seeking safety or a bear caught in a perilous financial trap.

Fifteen years after his famed bet against the mortgage market led to substantial gains, legendary investor Michael Burry has once again set his sights on a major financial maneuver.

This time, he has taken a “big short” position against the stock market by purchasing an impressive 40,000 put options contracts tied to SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ). The disclosed data from earlier this month showcased a combined nominal value of $1.6 billion for these contracts.

However, it seems that for now, Burry’s short position is at a heavy loss. Notably, a widely-followed stock trader known as Gurgavin on Twitter, revealed on August 27 that Burry is down 42% on his short bet, assuming that the investor is still holding the positions.

“Michael Burry is now down 42% on his “$1.6 billion” S&P 500 and Nasdaq short if he is still holding it.”

– Gurgavin noted.

Burry spent $26.5 million to build the ‘big short’

It is important to note that, while the combined notional value of the two positions was a whopping $1.6 billion, Burry spent only a minor portion of that figure to build his new big short.

According to Gurgavin’s estimates, the fund manager “likely only spent around $26.5 million to build his $1.6 billion dollar (notional) short position.”

In particular, Burry invested $18 million on 20,000 SPY put options and about $8.5 million on 20,000 QQQ puts, Gurgavin clarified.

There is a possibility that Burry built the two positions as hedges, aimed at softening the blow to his investment firm Scion Asset Management if the stock market declines and its long positions lose value.

On the other hand, the puts could also indicate that Burry is feeling bearish about the two flagship index funds, which are significantly impacted by large-cap stocks such as Tesla (NASDAQ: TSLA) and Nvidia (NASDAQ: NVDA).

Meanwhile, it should be emphasized that it remains unclear whether Burry is still holding the two contracts, given that there’s been no update on his holdings data since June 30.

Originally published by Vahid Karaahmetovic at Finbold