Wednesday, after the close, short interest for the current period was released, showing that short interest has remained at 31 million shares, roughly 40 percent of the float, confirming the theory from my article, Tesla Motors Short Squeeze May be Imminent, that shorts have not covered. Short interest currently sits at about 40 percent of the float and I suspect a squeeze could happen any day. The stock is currently at a 52 week high, and the demand for shares from new longs is telling me that un-hedged shorts may find themselves in a bit of a pickle come next week if they try to cover. If any "big event" causes "major" new buyers to come in, pushing the stock to new highs, those un-hedged who will try to cover may fund themselves unable to. Moments ago Elon Musk tweeted that we should expect an announcement on Friday, about a "new Tesla Motors strategy that owners will like." This "announcement" could be the trigger that ignites the Tesla (NASDAQ:TSLA) "short squeeze"
Who will shorts buy shares from?
If the majority of shorts attempt to cover, a huge squeeze, similar to the one that happened with Volkswagen (VLKAY.PLK), that resulted "short sellers" being forced to buy the stock at any price, resulted in Volkswagen's stock jumping 500 percent in one day, could happen. Elon Musk and the directors of Tesla Motors own about forty percent of the common stock. Of the remaining stock, 70 percent is owned by institutions and hedge funds. This means that a large number of Tesla shorts are naked. I own shares, and I'm confident many other retail investors own shares, implying that in theory over 113 percent of Tesla's shares are held by someone. If all of the shorts tried to cover at the same time, it is likely the shorts may have to pay a "major premium" to buy the shares, say 400-500 percent, and may require multiple days to "cover." At current volume it would take seven days for Tesla shorts to fully cover. This assumed that the shorts are able to find 31 million shares.
The "circuit breaker" won't save shorts
In response to my article, Tesla Short Squeeze May be Imminent, where I discussed the potential of a Tesla Motors short squeeze, I received a number of comments affirming that the "circuit breaker" would prevent such a squeeze from happening. To the best of my knowledge, the "circuit breaker" would not provide any protection for those short Tesla. The circuit breaker is a mechanism that prevents "new shorts" from jumping on board a stock when the price has fallen ten percent in a short interval, about 10 minutes. It also halts trading of a particular stock if the price falls beyond thirty percent in a similar time interval. To the best of my knowledge, there is no "mechanism" that prevents a stock from experiencing a 500 percent rise in one day.
It will be interesting to see what happens with Tesla's stock over the next week. Technically, based on the 14 RSI of 83, Tesla's stock is overbought. However, from my experience, technicals tend to matter more when fundamentals are absent. If Tesla makes a big announcement that prompts "new buyers" to jump in, and shorts to cover, no amount of technical analysis will prevent the stock from going up. Although it's possible that Elon Musk's "big news" will disappoint, resulting in the stock falling 7-10 percent, if the "big news" doesn't live up to "expectations," I feel confident that the potential return by going long outweighs the risk by going short.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.