Wednesday, August 19, 2020

"The Longest Unprofitable Short I’ve Ever Seen"

Have I mentioned our general "Don't Short Tesla" admonition?
From Institutional Investor, August 18:
Betting against Elon Musk’s Tesla
is the widow-maker trade of 2020
In July 20, Tesla did something that no company had ever done before: It saw the volume of bets made by its “haters” — the term co-founder Elon Musk uses to describe investors who bet that the electric-car company’s stock will fall — cross $20 billion.

To this day, those bets are a painful reminder that the “haters” have been consistently wrong. The company’s shares sped to a new high on August 17 — rising 11 percent from the record set the previous day of trading — to close at about $1,836 each. Their climb continued Tuesday to an unprecedented $1,887.

“It’s a picture of the perseverance of the short-sellers that are left,” says Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a financial-analysis company that shared data with Institutional Investor. The magnitude of losses short-sellers have endured is “just absurd,” he says, compared to bets against other companies, with Tesla “by far the longest unprofitable short I’ve ever seen.”

Yet Dusaniwsky saw no mad rush for the exits as Tesla’s shares skyrocketed almost 300 percent on the year to close at a then-record high of $1,643 on July 20. With the company’s market value soaring past price targets set by Wall Street analysts, he says, “it’s by far and away the largest short.”

It’s not short-sellers covering their positions that’s been driving up Tesla’s stock price, according to Mark Spiegel, who runs a small hedge fund that’s short the company. But he does have other suspicions.

“Some entity — I don’t know who — was executing a strategy of buying massive quantities of out-of-the-money call options,” forcing call-option sellers to buy enough stock to hedge their exposure, Spiegel, founder of hedge fund firm Stanphyl Capital Partners, suggested by phone. “This thing just kind of spiraled its way up.”

Another driver has been widespread enthusiasm among individual investors buying Tesla shares this year through trading apps like Robinhood, according to Spiegel. “There was this whole gambling mentality that took place,” he says, “partially because people got stuck at home” during the pandemic with stimulus checks to spend.

While huge losses have forced some investors to cover their bearish bets against the Musk-led carmaker, a dramatic short squeeze did not materialize in July, according to Dusaniwsky. He saw the percentage of shorted shares relative to Tesla’s publicly traded total hold about steady last month, even as the pain inflicted by its soaring stock price intensified....

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