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Just because something is expensive doesn’t mean you should short it via puts as Burry had done. Both Palantir and Nvidia have high IVs. You’re paying for that.

by lvl155 11mo ago

Just because something is expensive doesn’t mean you should short it via puts as Burry had done. Both Palantir and Nvidia have high IVs. You’re paying for that. You’re much better off looking for cheaper puts on securities with enough correlation. Since Volmageddon and pandemic craze, deep OTM options have been scalped to death. Rarely good value. Nvidia also didn’t report earnings yet which means you’re paying for that risk event. Not saying bullish or bearish. It’s all speculation BOTH ways.

the__alchemist 11mo ago
Can someone explain why puts make sense over shorting? For example, I'm betting against 5 quantum computing companies with short positions. I considered adding puts to the position, but it didn't make sense based on 2 reasons: High bid ask spread, and if it's a fraudulent company/otherwise worth betting against, the volatility will be high, so you option costs too much compared to the upside; the amount it has to drop to break even is too big.
- candiddevmike 11mo ago
  With a put, you can only lose what the put is worth. With shorting, you can in theory have infinite loses.
  - the__alchemist 11mo ago
    Yea; true. My thought when evaluating these was "I am confident the price will drop significantly within the next 6-18 months. But if I screw up the timing, or it drops to 1/3 the value instead of 1/2 etc, I lose money or break even. While I'm reasonably confident the normal short will pay off, since I don't have to nail the amount or timing.
    - ProjectArcturis 11mo ago
      With shorting, you run the additional risks that you could lose the borrow and be forced to buy back at any time. Or get margin called if the price moves against you. With puts, you have to get the timing right, but no external factors can force you out of your position.
    - nickff 11mo ago
      Even if you're right, but the value goes up before going down, you can lose out with a short, if your counter-party makes a call for collateral you don't have.
  - JumpCrisscross 11mo ago
    > With shorting, you can in theory have infinite loses This risk can be hedged with futures and options.
    - busyant 11mo ago
      Agreed. But it adds complexity. Sometimes you just want simple leverage, which the puts can provide.
    - javcasas 11mo ago
      Congratulations, you just invented the synthetic put.
      - JumpCrisscross 11mo ago
        > you just invented the synthetic put Short and a call, yes. Short and a future, no. Either way, infinite losses isn’t an unavoidable downside when it comes to shorting. Stock-borrow and margin risks are.
- twalla 11mo ago
  Options are just that - an option to transact at a certain price, if you choose not to you're just out the premium you pay. Short selling involves an obligation to return the shares, which has (theoretically) unlimited downside.
- luddit3 11mo ago
  Derivative markets are almost always there to provide leverage. Yeah, thinly traded options are a significant downside. If you can get in and out of the contracts, you can always combine options to remove some of those volatility costs by selling as well as buying, ie, spreads and ratios.
- JumpCrisscross 11mo ago
  > Can someone explain why puts make sense over shorting? Leverage, margin risk and stock-borrow risk. (The last refers to the folks who lent you the shares recalling them inconveniently.)
JumpCrisscross 11mo ago
> Both Palantir and Nvidia have high IVs The relevant Greeks are delta, gamma and vega. If your bet pays off, the price of the stock will decrease. Delta predicts how your option will increase in value with that; gamma if that relationship will accelerate or buffer. Vega, meanwhile, informs that the price suddenly crashing is volatility, which increases the value of your options. Succinctly, if you are betting on a crash, options offer advantages. (And if the market, but not your company, gets bailed out, vega could put you middlingly in the black.)
- lvl155 11mo ago
  I am not saying he won’t make money. But it won’t be commensurate with the risk he took on.
  - JumpCrisscross 11mo ago
    > won’t be commensurate with the risk he took on Former options market maker here. We have insufficient data to conclude that. I also happen to have experience unwinding correlation books after their originators shat the bed. Predicting a crisis is hard. Predicting correlations in a crisis for esoteric assets is almost impossible. Burry wanted to bet on specific overvalued stocks. Not a general market crash. For that, puts are probably the best tool if the expectation is a sharp correction followed by, in all likelihood, a Trump put.
    - deleted 11mo ago
      [deleted]
  - ekjhgkejhgk 11mo ago
    > But it won’t be commensurate with the risk he took on. On what basis do you say this?
roadside_picnic 11mo ago
> high IVs. You’re paying for that. Glad to see someone say it. A lot of people have a hypothesis about the market, but fail to do the follow through to see if the market has already priced that in. The real aim should be to see when your model (mental or mathematical) prices things differently than the market. In this case, it's actually quite reasonable to believe that the market has over priced the risk no matter how "sure" anyone is that these companies are over valued. It's entirely reasonable to pay for an option that you think reflects an unlikely scenario, but you also believe is mispriced notably by the market.
- drob518 11mo ago
  With options, the market has nearly always priced in the obvious risk. But not the non-obvious risk. Burry is not just saying, “I think these companies are overvalued.” Rather, he’s saying, “I think the bubble is about ready to pop.” While many people see the bubble, Burry is making a bet on the timing of the pop.
  - geoka9 11mo ago
    Yeah, my (limited) understanding is that the GP's argument would be valid for an options trader who looks for pricing inefficiencies to take advantage of (regardless of bullish/bearish outlook) but not _that_ important for someone betting on a black swan event?
  - ferrouswheel 11mo ago
    Yup, and the further out the expiry date for puts, the higher the price you pay. I looked into it and it's not that cheap - and feels like the market is already pricing in risk of a large correction. But you can still make a lot of money if you time it right.
lordnacho 11mo ago
Much simpler: I sat on an option desk for years, and whenever someone had a directional thought, the quip was "why don't you just buy/sell it then?"
- blitzar 11mo ago
  I would ask the options desk to price it up, decide it was too expensive, and just go short. Of course they did have a cheaper double no touch broken wing structure that would pay for their next mclaren.

by lvl155 11mo ago

the__alchemist 11mo ago

Can someone explain why puts make sense over shorting? For example, I'm betting against 5 quantum computing companies with short positions. I considered adding puts to the position, but it didn't make sense based on 2 reasons: High bid ask spread, and if it's a fraudulent company/otherwise worth betting against, the volatility will be high, so you option costs too much compared to the upside; the amount it has to drop to break even is too big.

candiddevmike 11mo ago
With a put, you can only lose what the put is worth. With shorting, you can in theory have infinite loses.
- the__alchemist 11mo ago
  Yea; true. My thought when evaluating these was "I am confident the price will drop significantly within the next 6-18 months. But if I screw up the timing, or it drops to 1/3 the value instead of 1/2 etc, I lose money or break even. While I'm reasonably confident the normal short will pay off, since I don't have to nail the amount or timing.
  - ProjectArcturis 11mo ago
    With shorting, you run the additional risks that you could lose the borrow and be forced to buy back at any time. Or get margin called if the price moves against you. With puts, you have to get the timing right, but no external factors can force you out of your position.
  - nickff 11mo ago
    Even if you're right, but the value goes up before going down, you can lose out with a short, if your counter-party makes a call for collateral you don't have.
- JumpCrisscross 11mo ago
  > With shorting, you can in theory have infinite loses This risk can be hedged with futures and options.
  - busyant 11mo ago
    Agreed. But it adds complexity. Sometimes you just want simple leverage, which the puts can provide.
  - javcasas 11mo ago
    Congratulations, you just invented the synthetic put.
    - JumpCrisscross 11mo ago
      > you just invented the synthetic put Short and a call, yes. Short and a future, no. Either way, infinite losses isn’t an unavoidable downside when it comes to shorting. Stock-borrow and margin risks are.
twalla 11mo ago
Options are just that - an option to transact at a certain price, if you choose not to you're just out the premium you pay. Short selling involves an obligation to return the shares, which has (theoretically) unlimited downside.
luddit3 11mo ago
Derivative markets are almost always there to provide leverage. Yeah, thinly traded options are a significant downside. If you can get in and out of the contracts, you can always combine options to remove some of those volatility costs by selling as well as buying, ie, spreads and ratios.
JumpCrisscross 11mo ago
> Can someone explain why puts make sense over shorting? Leverage, margin risk and stock-borrow risk. (The last refers to the folks who lent you the shares recalling them inconveniently.)

JumpCrisscross 11mo ago

> Both Palantir and Nvidia have high IVs The relevant Greeks are delta, gamma and vega. If your bet pays off, the price of the stock will decrease. Delta predicts how your option will increase in value with that; gamma if that relationship will accelerate or buffer. Vega, meanwhile, informs that the price suddenly crashing is volatility, which increases the value of your options. Succinctly, if you are betting on a crash, options offer advantages. (And if the market, but not your company, gets bailed out, vega could put you middlingly in the black.)

lvl155 11mo ago
I am not saying he won’t make money. But it won’t be commensurate with the risk he took on.
- JumpCrisscross 11mo ago
  > won’t be commensurate with the risk he took on Former options market maker here. We have insufficient data to conclude that. I also happen to have experience unwinding correlation books after their originators shat the bed. Predicting a crisis is hard. Predicting correlations in a crisis for esoteric assets is almost impossible. Burry wanted to bet on specific overvalued stocks. Not a general market crash. For that, puts are probably the best tool if the expectation is a sharp correction followed by, in all likelihood, a Trump put.
  - deleted 11mo ago
    [deleted]
- ekjhgkejhgk 11mo ago
  > But it won’t be commensurate with the risk he took on. On what basis do you say this?

roadside_picnic 11mo ago

> high IVs. You’re paying for that. Glad to see someone say it. A lot of people have a hypothesis about the market, but fail to do the follow through to see if the market has already priced that in. The real aim should be to see when your model (mental or mathematical) prices things differently than the market. In this case, it's actually quite reasonable to believe that the market has over priced the risk no matter how "sure" anyone is that these companies are over valued. It's entirely reasonable to pay for an option that you think reflects an unlikely scenario, but you also believe is mispriced notably by the market.

drob518 11mo ago
With options, the market has nearly always priced in the obvious risk. But not the non-obvious risk. Burry is not just saying, “I think these companies are overvalued.” Rather, he’s saying, “I think the bubble is about ready to pop.” While many people see the bubble, Burry is making a bet on the timing of the pop.
- geoka9 11mo ago
  Yeah, my (limited) understanding is that the GP's argument would be valid for an options trader who looks for pricing inefficiencies to take advantage of (regardless of bullish/bearish outlook) but not _that_ important for someone betting on a black swan event?
- ferrouswheel 11mo ago
  Yup, and the further out the expiry date for puts, the higher the price you pay. I looked into it and it's not that cheap - and feels like the market is already pricing in risk of a large correction. But you can still make a lot of money if you time it right.

lordnacho 11mo ago

Much simpler: I sat on an option desk for years, and whenever someone had a directional thought, the quip was "why don't you just buy/sell it then?"

blitzar 11mo ago
I would ask the options desk to price it up, decide it was too expensive, and just go short. Of course they did have a cheaper double no touch broken wing structure that would pay for their next mclaren.