No, Burry Didn’t Bet $530 Million Against Tesla, But He Did Do This
CNBC has reported that prominent investor and hedge fund manager, Michael Burry has executed a “$530 million bet against Tesla”. However, this is not exactly true. While Michael Burry has bet against Tesla’s share price, we do not know all the details about what bet he has actually made.
Burry bet against Tesla’s share price by taking out a long put options contracts. This is a type of derivative where the owner of the option contract can make a profit if the asset they bet on loses value. In other words, Burry’s actions reveal that he predicts Tesla shares will fall. However, we do not know enough about his trades to estimate just how much he has actually bet on this prediction.
What We Know About Burry’s Position on Tesla
On May 17th, an SEC report regarding Scion Asset Management, a private investment firm led by Michael Burry, revealed that the organization had bought put options against Tesla, equating to 800,100 shares (or 8,001 put contracts with each contract representing 100 shares). At the time of the purchase (which was March 31st), these shares were valued at around $534 million. However, it is not fair to call this a $534 million bet against Tesla.
For starters, the SEC report in question shows the notional value of a trade, not the market value. Notional values are determined by the underlying value of a derivative.
So in this context, the underlying value of the shares in Michael Burry’s put options contracts against Tesla was $534 million. But that does not mean the market value of his options equals the same. Notional value is best understood as the theoretical total amount that a trade can be worth, as it is calculated by the price of the underlying asset (in this case, Tesla’s stock).
Market value, on the other hand, is what the price of the trade is actually worth at the time that the trade is made. It is not theoretical in any way. This means that Burry likely did not bet $534 million against Tesla; it is quite sensible to assume that he bet less. The SEC report does not provide enough details for us to know for sure just how much money he has actually bet against Tesla.
We cannot calculate Michael Burry’s actual bet for a number of reasons. Firstly, we do not know what the strike price is for this put option. This is the price at which Burry has the right to sell shares of Tesla (note that a right is not the same as an obligation).
We also do not know when these 8,001 options contracts expire, or what the actual position was for each of these contracts. In other words, we do not know how low Burry predicted Tesla shares will go, or when exactly he predicted they would get that low.
How Bearish is Burry on Tesla?
It’s hard to say exactly how far Burry thinks Tesle will fall. Burry clearly believed Tesla stock was overvalued at the end of March, when he bought those long put contracts. But he could have bet that their share value would only drop by as low as $10, and he could have set his expiration far into the future—we simply don’t know those details. We also do not know how many of his contracts he has already closed, if any.
Tesla’s shares have dropped from $667.93 on March 31st, to $573.58 as of May 18. This is a 14.12% fall over the space of 1.5 months. If Burry set his strike price within that range, then he could have closed some of his contracts and made a profit already. But bear in mind, that would be far from a $534 million bet, in fact it would be quite a small bet.
We can also assess Michael Burry’s stance on Tesla by examining his opinions on the company. According to CNBC, Burry tweeted (but later deleted) that Tesla’s reliance on profiting via regulatory carbon credits was a red flag for its future. In fact, it is Tesla’s selling of these regulatory credits that keep the company afloat—along with government subsidies—as Tesla’s sales from cars and solar panels had actually caused it to lose $25 million in Q1 2021.
This is worrying because if Tesla’s flagship products are causing a loss, and the use of regulatory credits will eventually become unprofitable, then it leaves the company in a dire situation. Burry has also previously raised concerns about how high Tesla is valued compared to its rivals and peers in the same industry.
Michael Burry’s position on Tesla will likely become clearer in due time, either through his own announcements, or through other SEC reports and findings. However, until then, there is simply not enough information to make an educated guess on just how bearish he is.
Do you think Michael Burry was right to take out long put options against Tesla? Let us know in the comments!