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Michael Bury opened short positions in seven companies. Six of them work for him. Seventh—Nvidia, the most valuable company in the world, or it fluctuates between the title of the most valuable company and Apple, which recently overtook it. But, in his own words, it is the only one that brings losses.
This is the only position that loses money. He revealed this on Tuesday , the same day the S&P 500 closed at a record high for the first time since June, up 1.9%. The Nasdaq added 2.7%, almost 5% in two days. He opened short positions in semiconductor manufacturers, Micron, Nvidia, Caterpillar, Palantir, Tesla and Applied Materials.
And he still claims that a drop like in 1987, when the S&P fell 20% in one session, is possible. So which of these is true? Did Bury, whose shorts are mostly profitable against the backdrop of the all-time high, just rush, or does one losing position speak louder than six profitable ones? Let's find out in today's edition of Options Math Check.
So, we're at tastytrade, and this is a really interesting question. I mean, the risk of a significant sell-off from this level is always obvious. I think one of the most ambiguous situations in the markets recently has been the last few days: if you look at the VIX and superimpose its growth on the S&P, then, for example, yesterday the VIX index grew all day and remained high.
Today you saw it go up, and interestingly, the VIX was at 18.5 points. It is currently at 16.25 , but the market has not gone down. E-mini futures did not fall one iota. You can see that we have traded higher every day for the last four sessions. However, historically, increased volatility coupled with significant market growth is not necessarily a sign of market calm or complacency.
In general, when you see E-minis rising over time and the market is calmly rising, that's when volatility really tightens as intraday ranges also narrow. But over the past four sessions, we have seen massive moves up, and we have been exceeding the expected move of the SPX index every day. For example, we look at the SPX in the morning, there is a movement of 50 points, and we have an actual movement of 120 points.
And so it has been for the last few days. So it's interesting to see the markets calming down now and the volatility dropping a bit . But when you have these megacorporations controlling so much capital in this niche, you will always have the risk of a macro- selloff of these products, leading to a market crash.
I think when you look " under the hood" of ETFs like SMH and QQQ, you might be surprised to see that five to ten companies actually control a huge portion of these funds. So, agreeing with Berry, yes, we could see a major market crash, especially after the rapid rise we saw in the Nasdaq and E-mini.
Some say it was a result of capital reduction, leverage deployment, which is certainly part of this process. But when you look deeper and see profit fixation, and also remember the human factor, I believe that this will always be the case. Human factor: when you see losses or disappearing profits, you want to fix it.
You want to protect yourself, and this may lead to selling assets. And if everyone is selling, it only increases downward pressure. So I think the risk will always exist. The market always poses a downside risk if you look at the SPX or Nasdaq on any time frame. If you look at the SPX 15 days ahead, we are trading at 7750.
If we go to 7650 and to the equidistant strike above the price level, 7850. You will see a significant skew here. And what's really interesting is the comparison of the short term and the long term: 7650 versus 7850, you actually see the call skew, which is what we talked about this morning. A rare phenomenon that you won't always see is a built-in bias towards growth, similar to the feeling of a " short squeeze" that we observed through the massive buying of call options.
And in many ways, this can be the result of excessive short selling or opening too many shorts relative to face value . But eventually, if you look at the longer term, you'll see that things change closer to the put option skew, especially as you go further out of the money. So if we take the 8000 strike in the September cycle, trading at $5600, about 250 pips above the price, and then move to the 7500 level, you'll see this put bias start to show.
The premium is 6500 on the downside versus 5500 on the upside. So in the S&P 500 you will always see, especially in the long term, something like an escalator up in terms of risk and an elevator down, and that will continue forever unless there are some extraordinary, unique events where maybe there is a short-term call skew in markets like SPX.
But when you look at the probabilities and think about skewness, especially further back in time, the probability of a 1,000-point move up is lower than a 1,000-point move down, and you see that the put skewness and the put premium hold their value much better. So, markets are pricing this in. Markets will always factor in this tail risk of downside.
You rarely see the kind of upward movements we've seen over the past 4 days, but that doesn't mean they can't happen again. But right now the E-mini and Nasdaq are falling. This morning, the E-mini was up 50 points and the Nasdaq was up 150 points, and now, a few hours into the morning session, the E-mini is at zero and the Nasdaq is down 60.
So we are seeing some interesting moves " under the hood," but this could be building up on its own. If you start seeing more days where we get red days, red days, 100 point drops in the E-mini. If this happens a few times, you will see how it all changes. You will see a lot more put option skew pouring into the market.
You will see a surge in volatility . And again, if you have individual stocks that are driving this downward movement, and those stocks are being aggressively sold off, that is one of those catalysts that can lead to a massive downward movement in the S &P and Nasdaq. But let me know what you think in the YouTube chat and in the comments.
Of course, we always appreciate your input and, you know, your activity there. So let us know what you think about this movement in the markets. Let me know how you play NDX, SPX and whether you think shorting is still alive and well. But yeah, that was an interesting episode of " Options Math Check." We will continue to do this and publish on the YouTube channel. So see you next time.
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