Investing and the Tesla Short Squeeze

Tesla is on a tear with the stock price up nearly three-fold in the last year. While some see this as a vindication of their faith in Tesla over the years, others see the most recent surge in Tesla’s stock price as a classic short squeeze. While Tesla has been going up, many traders have shorted the stock in expectations of a substantial correction. When that has not happened, they have had to buy the more-expensive shares to cover their positions, this has driven the stock price even higher. Here are our thoughts on investing and the Tesla short squeeze.

Investing and the Tesla Short Squeeze

In just a month Tesla stock has gone from $450 a share to $900 a share. For a stock that sold for $17 a share when it opened a decade ago, this is an impressive success story. Many who have invested in Tesla over the years firmly believe that electric cars are the future of the auto industry and that Tesla will be the leader. However, Tesla has rarely made a profit and carries about $13 billion in debts. They had severe production delays a couple of years ago which took the stock down from the $400 range to about $200 before it started to recover in light of meeting production quotas and eking out a profit.

None of this prepares us for the stellar run-up of Tesla’s stock price in the last month. The Wall Street Journal looks at this situation and compares it to oil and bitcoin bubbles. They note that it has the characteristics of a short squeeze.

The gains are proving to be a thorn in skeptics’ side. Despite some short-covering over the past few weeks, there is still some $14 billion in short interest against Tesla, making it the most shorted U.S.-traded company, according to financial analytics firm S3 Partners. Short sellers borrow stocks and sell them, profiting if they are able to repurchase the shares at lower prices.

“The situation is a textbook short squeeze, albeit on an unprecedented scale,” said Matt Weller, a market researcher at Gain Capital. Last fall, short interest in the stock was about 25%. As the price went up, those traders were forced to sell their stock, which drove the price up. That forced others to sell, which further drove the price. “And so on,” Mr. Weller said.

Short interest is still around 13%, he said, so that dynamic may not be done playing out.

Investopedia defines a short squeeze.

A short squeeze is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing short sellers to close out their short positions and adding to the upward pressure on the stock. Short sellers are being squeezed out of their short positions, usually at a loss. Short squeezes are generally triggered by a positive development that suggests the stock may be embarking on a turnaround. Although the turnaround in the stock’s fortunes may only prove to be temporary, few short sellers can afford to risk runaway losses on their short positions and may prefer to close the position even if it means taking a substantial loss.

In short, if you will forgive the pun, Tesla is currently the most-shorted stock and many short sellers have been forced to get out of their positions by purchasing a higher price which in turn drives the price even higher.

These situations typically correct themselves when the stock finally heads back to its intrinsic stock value. We may have seen the start of that dynamic at the end of yesterday when Tesla fell by about $100 at the end of the session.

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