Michael Burry, head of Scion Asset Management, has a huge short position in the stock of Apple. Some of the reasons why he might be expecting AAPL stock to fall and how you can follow him in this trade will be explained in this article.
The largest position of Scion Asset Management is its put option holding. The assets reported in the 13F filing have 17.86 put values. Assuming the firm is long those puts, the only way it is profitable is if AAPL stock falls a lot in a short period of time.
Michael Burry was killed in the line of duty.
This is a big short bet. One of the main characters in the book and movie, The Big Short, was Michael Burry. Many people look at the stock when he takes a large position like this.
We don’t know when the big purchase of puts was. We don’t know how much he paid for the options or the strike price. The stock has to fall below the strike price in order for the position to be profitable, since all options involve paying a premium.
First, let’s review why it makes sense to buy puts in AAPL stock, and then review what the stock is worth. There are some put trades we can look at.
There may be short themes against AAPL stock.
According to the Unrivaled Investing channel, there are three possible reasons why Burry might be short AAPL stock.
The valuation of Apple’s stock has risen. It is at a 24x P/E multiple for the next 12 months. Over the past two years, the forward NTM P/E multiple has increased.
This can be seen in the charts. Three years ago, Apple’s P/E ratio was 15.9x and now it is 25x on a trailing 12-month basis.
It is possible that Apple is losing market share in the mobile phone market. According to Counterpoint Research, Apple’s U.S. market share fell from 50% in the fourth quarter of 2020 to 50% in the first quarter of 2022. There are reports that Apple will cut production at the end of March due to problems in its manufacturing operations.
In its April 28 conference call, Apple said it would experience $4 to $8 billion in challenges. Apple expects its gross margins to fall. In its most recent quarter, the gross margin was 42%.
The disposable income of the U.S. has fallen in the past few quarters. The Federal Reserve Economic Data shows that disposable income has fallen over the course of a year. Consumers will not be able to spend money on things like Apple products.
There is a barchart of AAPL.
APPL stock could be worth a lot.
In the last six months, Apple produced 69.815 billion in free cash flow, a 35.5% FCF margin. In the latest quarter, the FCF margin fell to just 26.6%.
If the margin falls to 25%, we will get an FCF estimate of $98.6 billion. If we say that this FCF is a 15x multiple, the target market cap will be $1,477.5 billion.
APL has a market cap of $2,157 billion. The stock could fall by 31.8%. The value of the stock would be $91.21. This can be used to figure out what strike price to buy puts is.
Buying puts.
A $125 strike price put has the largest number of put contracts as of May 20, according to Barchart’s option series. That could be a sign that Burry is in that position.
The strike price puts on July 15, 2022.
It costs $5.10 per put contract between the bid and ask prices. Each contract costs $510 To make a profit, AAPL stock needs to fall below $125.00, $5.10, or $119.90. Today’s price is $133.66, which is a decline of 10%.
If you think there is a good chance that AAPL stock will fall below $119.90, you can buy these July 17 $125.00 strike price puts. There are two months for this trade to work out. You will be in good company with Michael Burry.