Michael Burry, the renowned investor famously chronicled in “The Big Short” for his prescient bet against the housing market, has once again captured market attention with significant put options against AI bellwethers Palantir and Nvidia. This move, as discussed on CNBC’s Power Lunch by Susquehanna’s Co-head of Derivative Strategy Chris Murphy and KKM Financial CEO Jeff Kilburg, unpacks the mechanics and implications of Burry’s latest contrarian stance, prompting a re-evaluation of shorting strategies within the red-hot artificial intelligence sector.
The discussion centered on Burry’s recent 13F filing, which revealed 50,000 put options on Palantir and 10,000 on Nvidia. Chris Murphy, an options guru, clarified that the notional value of these options, often cited in headlines, can be misleading. He explained that "those notional calculations really overstate the size of these options because you're multiplying the size of the option trade times the current value of the stock, but once again, we don't know if he paid 50 bucks or 5 cents." This highlights a critical nuance: options, particularly out-of-the-money puts, can be a less aggressive, capital-efficient way to express a bearish view compared to outright shorting equity, as they define maximum loss at the premium paid.
Jeff Kilburg offered a broader perspective on Burry's track record, acknowledging his legendary call on the subprime mortgage crisis but tempering it with recent missteps. He recalled how Burry was two years early on that housing market trade, enduring "some pain as there is associated decay in owning puts." Kilburg also pointed to Burry's 2021 fade on Tesla, after which the stock doubled, and his "sell" tweet for the S&P 500 in 2023, preceding a 70% rally. These instances suggest that while Burry’s foresight can be profound, his timing is not infallible, a crucial consideration for anyone contemplating replicating his trades.
The core insight emerging from the discussion is the inherent risk and potentially misguided nature of shorting the leading AI innovators at this stage. Kilburg vividly articulated this sentiment, stating, "Going at Alex Karp [Palantir CEO] and Nvidia... that's like going at Zeus and Apollo, the two AI gods." He further asserted that "trying to be short [AI] I think is absolute bad idea." This perspective underscores a prevailing bullish sentiment among many market participants and tech insiders who view AI as a foundational, transformative technology with significant long-term growth potential, making short positions a perilous gamble against powerful secular trends.
While options offer a defined risk profile, the cost of betting against highly volatile, high-growth stocks like Palantir, which Murphy noted are "high volatility stocks," remains substantial. Even if Burry's puts are out-of-the-money, their premiums would reflect the market's expectation of significant price swings. The panelists emphasized that without knowing the specific strike prices, expiration dates, or whether these puts are part of a larger, hedged strategy (like a put spread, where short puts might offset long ones), the true intent and potential impact of Burry's position remain speculative.
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The strategic decision to use put options rather than directly shorting shares also reveals a calculated approach to risk management. Shorting equity carries unlimited downside risk, as a stock theoretically can rise indefinitely. Conversely, purchasing a put option caps potential losses at the premium paid, regardless of how high the underlying stock climbs. This makes options a more palatable instrument for expressing a bearish view on high-growth, high-volatility assets, even if the conviction is strong.
Ultimately, Burry’s move serves as a provocative market signal, but its true implications are shrouded in the opacity of options trading. While his past successes command respect, the current bullish momentum in AI, fueled by continuous innovation and adoption, presents a formidable challenge to any short thesis. The consensus from the CNBC panel leaned heavily towards caution against betting against the "AI gods," suggesting that while Burry's contrarian spirit is admirable, the current AI landscape may not be ripe for a "Big Short" sequel.
