Michael Burry's $1.6B Bet On A Stock Market Crash?

Michael Barry just revealed what mainstream media is calling a massive bet against the stock market, but in reality, there's a bit more to it than that. Barry, who has been radio silenced and is deleting his Twitter account, earlier this year has just released his Q2 13F filing. In it, we see two notable options bets against the stock market.

On first glance, it reads that he's opened two massive put option positions against both the S&P 500 and the NASDAQ 100, worth $887 million and $739 million dollars respectively. Although this is a bet against the market, the truth is the media and the Twitter community have really blown this one up much bigger than it deserves to be. Because in reality, his bet is probably reasonably small, certainly nowhere near as large as what the headlines are suggesting.

You see, put options give the holder the right to sell shares at a predetermined price called the strike price. Thus, if I bought a put option with a strike price of ten dollars, I would want the share price to fall below $10 because then I can buy the share in the open market for less and sell them to the investor that wrote me the put option for ten dollars. If the share price fell to six dollars, I have the right to sell to this investor for $10, and I pocket four.

That is exactly what Michael Barry has done with the S&P 500 and the NASDAQ 100. He's bought put options from another investor, and to make money, he needs the value of those ETFs to fall below his strike price. But here's the thing: he has not bet over $1.6 billion on these indices falling. This number represents the total market value of the number of shares he bought put options against.

In reality, put option contracts cost a heck of a lot less to purchase than the stock itself. So no, he's definitely not made a $1.6 billion bet against the market. His 13F confirmed he bought put options against four million shares—2 million each against SPY and QQQ—which means in total, he's bought 40,000 put option contracts, as each option contract represents 100 shares.

But here's the thing: if we log on to Yahoo Finance and look at the put option contracts with expiry dates roughly a month from now, depending on the strike price, we see costs of $0.30 per share, $1 per share, $6 per share. That's a lot lower than the share price of SPY, which is currently sitting around $450 per share. So, with that said, how much did Michael Barry bet against the market?

Well, unfortunately, the reality is we simply don't know. The reason we don't know is that the only thing that gets reported is how many option contracts he ended up buying and whether they were puts or calls. What we don't get is information around what the strike prices were or even the expiry dates. And without getting too into the weeds, those two factors greatly influence the price the put option will cost to buy.

The closer the strike price is to the current share price, the more the option will cost because it’s more likely to work out in the buyer’s favor before the expiration date. Along that same line of thinking, the longer the options expiry date, the more the option will cost because there’s more time for the conditions to come to fruition.

So, with this in mind, Michael Barry could have done a range of things. He could have spent a small amount of money making a bet that the market will fall a lot, or he could have made a much larger trade betting that the market will fall a little, or, of course, there’s nothing to stop him from doing a mix. And on top of that, we don’t even know what time frame he’s betting on it happening.

Unfortunately, when it comes to options reported in the 13F, there’s simply not enough data given to us for us to conclude anything beyond the fact that Michael Barry is indeed making some sort of bet where he’ll make money if the S&P 500 and the NASDAQ 100 fall in value.

Here’s the other thing: as is usually the case with Michael Barry, it’s hard to take away any strong conclusions from his 13F because he's proven time and time again that while he has the brain of a value investor, he does like to make short-term trades. He isn’t the same buy-and-hold investor like a Warren Buffett or a Charlie Munger.

In fact, he dances in and out of the market so much that because the 13Fs get held for 45 days after the end of the quarter, we can’t even be sure he still holds these put option positions. It very well could be the case that he’s already sold out of them and moved on to something else. The same goes with the changes he’s made to his equity portfolio.

So, with that said, let’s now talk about that equity portfolio, and this is where the plot thickens because while he’s betting that the S&P 500 and the NASDAQ 100 will fall, he’s also gone ahead and added a lot of individual stocks to his portfolio.

It makes sense that he added 25 new stocks, added to three existing positions, then he reduced three positions and he sold out of 15. That is quite the portfolio turnover. And if you notice, he’s got almost the exact amount invested at the end of Q2 versus the end of Q1, so he’s literally just subbed out a whole bunch of names and subbed in others.

It very much looks like a trader’s portfolio, right? I’ve made this point before, but I’ll make it again: look at Warren Buffett’s 13F history and how consistent that is. He’s obviously a long-term investor. Now look at Michael Barry’s; notice something? It’s all over the place. The only consistent thing there is inconsistency.

So take it all with a grain of salt. But with that said, why would Michael Barry seemingly contradict himself in the same 13F filing? He’s bought 25 new stocks at the same time as betting the stock market is going to fall.

Now, this one stopped me for a while until Hamish reminded me about the composition of the S&P 500 and the NASDAQ 100. Look at the weight of both of these indices side by side. Notice the biggest holdings of both of them: Apple, Microsoft, Amazon, Nvidia, Meta, Google, Tesla. These seven businesses are what's now being called The Magnificent Seven.

Why? Because they are responsible for a very large portion of the S&P 500's rally across 2023, and it all boils down to speculative hype around those big buzzwords: artificial intelligence. So I think in the case of Michael Barry's portfolio, what he's really doing is making a short-term bet that this stock market hype caused by AI isn’t going to last.

If these seven stocks run out of steam—because they hold literally 27% of the weight of the S&P 500—they could drag the entire market and particularly the NASDAQ 100 down. But then on the flip side, he’s still finding individual opportunities out there, hence he’s added those 25 stocks to his portfolio.

What did Michael Barry do with his portfolio in Q2 2023? Well, the first big follow-up from Q1 is that he decided to exit the Chinese tech stocks he held, that of course being Alibaba and JD.com. These two stocks comprised 20% of Scion’s U.S. stock portfolio at the end of Q1 and they were actually his top two largest positions at the time.

I speculated that there was potential for these positions to stick around as both stocks had managed to stick around in the portfolio across multiple quarters and he did have prior dealings with both. But well, that clearly was not to be. He likely would have still made money on this bet, though. JD would have most likely been roughly break even for him, as it was sitting around its 2022 low price in the second quarter.

On the Alibaba front, it's likely he made a good chunk of change, with the shares rising as much as 60 percent higher from their Q4 low in Q2. So that seems to be it for the Chinese tech stocks.

Another story we saw from his sales was that he closed out his position in the U.S. Regional Banks. Of course, we know the U.S. Regional Bank stocks got absolutely crushed earlier this year as we saw a few dominoes start to fall, thanks to depositors withdrawing funds. But there’s no doubt this caused a lot of fear in bank shares—fear that Michael Barry took advantage of.

With the unpredictable and volatile nature of bank runs, he didn't just make a bet on one or two Regional Banks; he made a basket bet on a few. Those names included PacWest, First Republic, Huntington Bank Shares, New York Community Bancorp, and Western Alliance. Smart in theory, although it looks as though his results would have been fairly mixed on this bet.

Of course, we know First Republic definitely didn’t work out, but he also would have likely lost money on Huntington Bank Shares while likely being roughly break even on Western Alliance and probably making money on PacWest and New York Community Bank. So definitely a mixed bag, but he has decided to wrap that up and move on.

There were also a few notable buys this quarter as well. Notably, Barry bought into two travel-related businesses: Expedia and MGM Resorts International. Expedia operates a few different online travel brands, including Expedia, obviously, as well as Hotels.com, Verbo, Orbits, Travelocity, Ebookers, and What If.

Interestingly, Expedia is now the largest holding in Barry's portfolio at 9.82%, worth around $11 million dollars. He also bought MGM Resorts International, which is a global gaming and entertainment company that owns 17 U.S.-based casinos, has a 56% stake in MGM China, and owns online gambling site Leo Vegas.

If you've ever been to Vegas, chances are you've donated more than a few dollars to MGM Resorts. Beyond these two businesses, Barry also made significant investments in Charter Communications, Generac Holdings, and CVS Health.

One note that I picked up from Unrivaled Investing's recent video on Michael Barry's 13F is that many of these businesses trade at really quite low price-to-free cash flow multiples. So it shows you that Michael Barry is still very much in that value mindset, albeit being a very short-term focused investor.

Expedia and CVS both have price-to-free cash flow multiples of seven. Charter's at ten. Going down the list further, you also have Stalantis at five, Vital Energy at four, Warner Brothers at nine. As is the case with Michael Barry, while he might be a little bit too much of a short-term focused investor for my liking, he still does have that classic value mentality. Many of these stocks are what you would call classically quite cheap.

Of course, as I said earlier, I don't think there's too much more we can take away from this information, besides maybe using it as a bit of an ideas list for some businesses that could be worth looking into ourselves. But with that said, guys, that is Michael Barry's 13F filing for Q2. Definitely let me know what you think down in the comments section below. If you liked this video, please leave a like on it and subscribe if you'd like to see more. But with that said, I'll see you guys in the next video.