Schaeffer's Trading Floor Blog

A Lesson in Numbers: The George Soros Edition

Why a short SPY position from a big-name investor isn't as scary as it seems

by 8/19/2014 8:39 AM
Stocks quoted in this article:

Anyone inclined to follow the giants into and out of stocks must have gotten chills reading about what George Soros is doing in his portfolio. (Thanks to Jeff Miller for giving me the heads-up.)

It seems legendary hedge fund billionaire George Soros might be souring in his view on the market outlook for U.S. stocks, based on his most recent 13-F filing in the U.S., which showed a 605% increase in his short S&P 500 position (through put options on 11.29 million shares of SPDR S&P 500 ETF) to $2.2 billion.

In a 13-F filing three months ago, Soros' fund had puts on 1.6 million shares, valued at $299.264 at the time.

Even though he is still net long stocks, this took the short position (where he owns an option which will profit from a fall in stocks prices) on the S&P 500 from 2.96% of his Soros Funds Management Portfolio to a whopping 16.65%.

Look out below!

Or not.

I do strongly believe it's more important to watch what someone does with their "feet" than what they do in a speech or an answer to a question in a CNBC interview. So, yes, it's worth paying attention to again, if you like following these guys.

The numbers here don't really make a lot of sense, though. Or alternatively, there's a bit less here than meets the eye.

You can look at an options play in two different ways. One is the amount of money actually invested in the options. From above, that's the $299,264 worth of puts Soros had in his previous filing. That is the financial equivalent of one of us buying a warranty on a $500 TV at Best Buy (terrible idea, by the way). In other words, it has a relatively tiny impact.

The other, and more proper way to look at a put purchase, is to turn it into a delta equivalent. Soros owned puts on 1.6 million shares, or -- using a price of $180 on the SPDR S&P 500 ETF Trust (SPY) -- $288 million of SPY. As of three months ago, he owned puts on $2.2 billion of SPY! That's BEEEE-llion!!!!

But alas, that's not delta equivalent, that's just the quantity. We don't know (or at least I don't know) the expiration date of the puts. But, we do know based on his dollar investment, that they're pretty far out of the money. If they have a negative 0.10 delta -- which they very well might -- they might have a delta equivalent of shorting $220 million of SPY. If it's negative 0.20 delta, it's equal to $440 million, et al.

My assumption is, when they say his short position has increased to 16.65% of his portfolio, it just takes the absolute quantity of puts and relates them to his overall portfolio of three months ago. The reality is his "short" bet is way smaller than that. It smells of de facto cheap-dollar insurance from his perspective.

So on the margins, yes, it indicates that three months ago, a very smart investor got more interested in protecting his portfolio. The reality is, it's not as big a bearish bet as the news flash implies.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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