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Here’s why Michael Burry’s huge ETF bet is at risk

Here’s why Michael Burry's huge ETF bet is at risk

Renowned investor Michael Burry made headlines earlier this year when regulatory filings exposed his substantial bearish wager against the stock market

Burry, known for his uncanny foresight, acquired a whopping 40,000 put options targeting two of the most popular stock exchange-traded funds (ETFs), which collectively mirror the performance of numerous US-listed stocks

However, it appears that one of these funds may be defying his predictions as a potential bull pattern forms on its chart. 

What happened?

According to well-known chart analyst Jake Wujastyk, the Invesco QQQ Trust ETF (QQQ), one of two ETFs Burry bet against, may be shaping a bull flag pattern

“Very possible that this is just one big bull flag,” Wujastyk noted in the October 25 post.

Potential bull flag forming on QQQ chart. Source: Jake Wujastyk

A bull flag is a bullish technical chart formation in which a stock’s price exhibits a brief consolidation phase, typically after a strong upward move. 

It is characterized by a rectangular-shaped flag, where the price range narrows, and trading volumes often decrease. 

Put simply, this pattern suggests that investors are taking a breather before potentially resuming the upward momentum. Traders and analysts often view a bull flag as a signal of a short-term continuation of the prevailing uptrend.

Why could this be bad for Burry’s investment?

The ETF in question, QQQ, tracks the performance of the NASDAQ-100 Index. Notably, this index includes 100 of the largest non-financial companies listed on the NASDAQ stock exchange, primarily in the technology and internet sectors.

By buying put options, Burry obtained the right to sell his QQQ holdings at a predetermined price within a particular time frame.

These derivative instruments rise in value as the underlying asset’s price declines and lose value as the underlying asset’s price grows. 

In summary, if Wujastyk’s analysis proves accurate and the typical outcome of a bull flag pattern unfolds, resulting in price increases, it could lead to a potential surge in QQQ’s price. Consequently, this would imply a decline in value for Burry’s options investment. 

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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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