Tesla is a heavily shorted stock, with short interest 28.6% of the float as of January 13, 2017. Table below shows that Tesla is 42nd in the list of stocks with highest short interest as a percentage of float. It is the company with the largest market cap with such a high short interest.
Source: Wall Street Journal
With the stock price rising 16% in January, it is expected that some of the shorts had to cover. The chart below shows the change in short interest and stock price.
There are many vocal investors who are short Tesla including Jim Chanos of Kynikos Associates, who has been extremely critical about Tesla's acquisition of SolarCity. Chanos is the legendary investor whose previous shorts included high-flying company Enron, which filed for bankruptcy in 2001. Chanos has said that the merger will make Tesla a walking "walking insolvency, corporate governance at its worst and shameful." He also called Tesla "anti-Amazon".
On Seeking Alpha there are many who have been detailing their short thesis like Paulo Santos, Logical Thought and Montana Skeptic. This article doesn't seek to discuss the reasoning behind being short or long with Tesla. On January 3rd Tesla announced that it missed its 2016 delivery estimates, but over the next month the stock has risen over 16%.
This article discusses option strategies based on the expectation that Tesla stock price will drop after earning report. The stock price has been holding up and increasing primarily because of Elon Musk and his promises.
- Musk convinced Tesla shareholders that its acquisition of SolarCity was in its best interest, but others have called it an "inside job" and "corporate governance at its worst"
- Musk joined Trump's economic committee, primarily to protect EV rebates and protect SpaceX interests. But now people are responding with #cancelmyTesla and #boycottTesla twitter.com/RayLord/status/826061094338846720, www.buzzfeed.com/priya/people-are-cancel...
- Musk promised that Model 3 will start production in second half of 2017 and start shipping Q4 2017. But in the past Tesla needed 20 months of testing on production models of Model S and Model X. Model 3 hasn't started production vehicle testing yet and one can safely expect it to not ship Model 3 till second half of 2018. bit.ly/2iG6WBo
- Musk convinced Tesla shareholders that Gigafactory was crucial for shipping Model 3. But this and the long term agreement with Panasonic has tied Tesla to a technology that is expensive compared to other solutions and puts Tesla at a disadvantage.
- Musk stated on twitter that Tesla will not need another equity raise in 2017. This is difficult to believe, given the track record of not disclosing "autopilot" fatality before previous equity raise.
This article discusses option strategies based on the expectation that Tesla stock price will drop to $230 after earning report.
As Tesla is a heavily shorted stock, limiting ones exposure to losses is important. Also Tesla shares have frequently behaved in contrast to its fundamentals. During the conference call Musk might have to elaborate about Model 3 release dates, cancellations due to joining Trump's committee, explains the heavy losses (GAAP) in 2016 and need to raise capital.
There are many ways one can be short a stock. One can directly short the underlying stock or trade with options. Table below compares these instruments with an investment of $1000 and assumption that current TSLA stock price is $250. (all calculations don't include trading commissions or margin costs)
1. Shorting the TSLA common stock
When a client wants to short a common stock, it would typically involve the broker borrowing the shares from the original owner, then this share is sold by the client to the new buyer. NASDAQ publishes short interest of a stock twice a month. At some future date the client has to close the short by buying back the shares and return them to the broker. If the share price has risen, the client be buying back the shares at a higher cost and incur a loss of the difference. If the price has fallen, then the client buys back the shares at lower cost and would make a profit of the difference.
The table below shows that on an investment of $1000, a client would make a profit of $80 if the share price drops to $230 but the maximum loss has no limit (as the stock price can theoretically rise to any value). If the client has a margin account, they can short more shares. For example ETrade allows 30% margin for shorting Tesla shares, so this client can sell short 13 shares and would make a profit of $260 if the share price drops to $230.
2. Buying Put options
"A put option is an option contract giving the client the right, but not the obligation, to sell a specified amount of an underlying security at a specified price (the strike) within a specified time(the expiry)."
If the stock price is below the strike price, the client would make a profit and if stock price is above the strike price, they would lose the amount it cost to buy the put options.
A. For example the Feb 17 put option at the strike price of $240 cost $0.80 (1 option = 100 shares). So buying 1 put option would cost $80 and 12 put options would cost $960. The maximum loss is $960, and all this is lost if the stock closes above $240 on Feb 17. If the stock closes below $240, one makes a profit. So $240 is the break even level.
B. The Feb 17 put option at the strike price of $250 cost $2.62. So buying 1 put option would cost $262 and 4 put options would cost $1,048. The maximum loss is $1,048, and all this is lost if the stock closes above $250 on Feb 17. Share price at $250 is the break even level.
3. Bearish Put Spread.
A. Buy a Feb 17 put option at the strike price of $250 and sell a Feb 17 put option at the strike price of $230. The maximum loss at expiry is $256 if stock price ends over $250 and maximum gain is $1744 if stock price ends below $230. The break even level is at the share price of $247.43.
Source: Etrade Pro
B. Buy a Feb 17 put option at the strike price of $250 and sell a Feb 17 put option at the strike price of $240. The maximum loss at expiry is $200 if stock price ends over $250 and maximum gain is $795 if stock price ends below $240. The break even level is at the share price of $248.01.
Source: Etrade Pro
The above strategies are summarized in the table below.
Please let me know what you think below.
Edit: Tesla earnings is on Feb 22nd, so please invest appropriately.
Below is a message from a person who is short Tesla and whom I respect immensely.
"I am very negative about the Tesla fundamentals. Hugely negative.
But I always caution it is a very dangerous short. It is for gamblers only.
The share price is utterly detached from fundamentals. It is a religion, not a financial investment.
Right now, the exceptionally odd bromance between Trump & Musk complicates things even further. Also, there is a rumor afoot that Tesla will announce an assembly plant in Indiana for the Model 3.
It would be totally idiotic to build a plant in Indiana, but I can imagine the politicians courting Tesla for such a plant and offering generous subsidies. And, that move could send the stock flying.
So, right now, I continue to urge people not to short this dangerous company, even though I am exceedingly negative about its management, business plan, ethics, and prospects. "
Disclosure: I am/we are short TSLA.