TSLA Market Action: 2018 Investor Roundtable

[UnknownSoldier]

I have a couple of aquaintances that opened new short positions yesterday. They were previously bearish on Tesla, but were unwilling to short due to the possibility of large increases in the share price if market remained irrational (from their viewpoint). They now feel comfortable shorting, their thinking being $420 caps there losses.

I dont agree with their strategy at all (Im long via calls) - but just thought I woudl share what perhaps many are thinking.

I need someone to explain to me like I'm 3 years old how shorts think their potential losses are capped in a buyout.

Because from where I'm sitting, the old lesson about short selling goes:

"He who sells what isn't his'n, must buy it back or go to pris'n."
- Daniel Drew

 

[Johan]

I have a couple of aquaintances that opened new short positions yesterday. They were previously bearish on Tesla, but were unwilling to short due to the possibility of large increases in the share price if market remained irrational (from their viewpoint). They now feel comfortable shorting, their thinking being $420 caps there losses.

I dont agree with their strategy at all (Im long via calls) - but just thought I woudl share what perhaps many are thinking.

When your aquaintances take up a short position they borrow stock, sell it on the open market thus opening a short position. The position will remain open until it's closed. The way the position is closed is by the stock being re-bought in the market. If the stock is bought back at a lower price than where the short position was opened you make money, if the stock is bought back at a higher price yoy lose money on the trade. This I suppose they understand, since this is what shorting is and they're taking part in the pratice.

Now, you should inform your aquintances that the $420 number refers to a price level at which some large financers pledge to buy TSLA stock from current owners of stock who for whatever reason do not wish or are not able to hold on to their stock when Tesla de-lists from the NASDAQ stock exchange. There is absolutely no-one guaranteeing that they will sell TSLA stock at neither $420 nor any other particular price. If (when) the deal goes through that means that $420 is a hard floor for sellers but it is in no way a hard ceiling for buyers. In closing a short position you are not a seller but a buyer. The buyer must pay whatever the market demands. Their potential losses are uncapped and in theory unlimited.

 

[shlokavica22]

Question- is there a way to see the number of naked calls/puts as a part of the Open Interest?

 

[LordAstinus]

I can see 4 basic szenarios:

1) There is no funding.
The stock and Elon will get destroyed.
But the company fundamentals wont be affected beyond financing, which shouldn't be a problem if Q3, Q4, ... are positive. So new Investors might be able to get in at a bargain after the bloodbath.

2) Board denies request.
Because they think staying public is the better path into the future.
Then we're back at the state prior to the announcement, minus the stock equivalent of a CEO getting reigned in by his board..
Company fundamentals are unaffected.

3) shareholders vote No
Because the majority thinks the stock is worth more than 420.-
And they can't hold private tsla due to broker constraints or liquidity concerns.
This should still put a confidence floor at 420.- because 50%+ think below that price is a good buy.

4) shareholders vote Yes
All shorts get a margin call.
35m shares (assuming no covering till vote) can get out above 420.-
Or tesla could raise up to 20% new equity (14B!) without needing a single new shareholder!!
If more want to get out, they'll do so at a guaranteed 420.-

Any guesses on the respective probabilities?

1) 1%

2) 10%

3) 25% -> Because of the low price. If it happens after Q3 earnings / FSD hardware are released 30%, if before, 20%.

4) 64%

 

[ls7corvete]

When your aquaintances take up a short position they borrow stock, sell it on the open market thus opening a short position. The position will remain open until it's closed. The way the position is closed is by the stock being re-bought in the market. If the stock is bought back at a lower price than where the short position was opened you make money, if the stock is bought back at a higher price yoy lose money on the trade. This I suppose they understand, since this is what shorting is and they're taking part in the pratice.

Now, you should inform your aquintances that the $420 number refers to a price level at which some large financers pledge to buy TSLA stock from current owners of stock who for whatever reason do not wish or are not able to hold on to their stock when Tesla de-lists from the NASDAQ stock exchange. There is absolutely no-one guaranteeing that they will sell TSLA stock at neither $420 nor any other particular price. If (when) the deal goes through that means that $420 is a hard floor for sellers but it is in no way a hard ceiling for buyers. In closing a short position you are not a seller but a buyer. The buyer must pay whatever the market demands. Their potential losses are uncapped and in theory unlimited.

I agree, though historically stock tend to trade below the buy out price. The price difference reflecting the market's perceived risk of the buyout not succeeding.

Obviously, bears perceive the odds of a buyout at 420$ occurring as low, and continue to short.

 

[Tslynk67]

SEC Makes Inquiries To Tesla Over Musk's Tweet About Possibly Taking Co Private - CNBC, Citing DJ

"SEC Says Social Media OK for Company Announcements if Investors Are Alerted
FOR IMMEDIATE RELEASE
2013-51

Washington, D.C., April 2, 2013 —

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information..."

link to full PR here.

Now, one could maybe argue, that investors have not been notified that Elon's Twitter is a place where such information will be disseminated. However, I imagine that would be a hard sell to any judge.

1. This is not the first time Elon posts relevant Tesla information on his personal Twitter account. In fact, he has been doing this almost every day ever since he has his official account.
2. Elon tweeted at 12:48 PM. Within minutes, the internet exploded with the news and it was live on CNBC as all relevant financial media follows his Twitter, knowing point No. 1.

Now, whether they should have filed official documentation for this with the SEC at the time of the announcement, IDK. Not sure about the rules and deadlines on that. But with 22m Twitter followers, Elon's account has more eyeballs glued to it than most financial media.

So here's a copy-paste of what I wrote on Electrek:

I cannot think of a quicker, or wider, form of communication than an Elon Musk tweet... every investor, every short, every bull and bear is following closely.

What did they do in the old days? Send a circular memo to brokers and ask them to call around the shareholders? An ad in the papers?

Seems extremely efficient and even-handed to me.

If anything, the shorts should be happy as Elon may have limited their losses with the $420 offer. Otherwise the squeeze was definitely on, you saw how the SP popped with the news if the SA investment - which was before Elon’s tweet.

 

[Johan]

I agree, though historically stock tend to trade below the buy out price. The price difference reflecting the market's perceived risk of the buyout not succeeding.

Obviously, bears perceive the odds of a buyout at 420$ occurring as low, and continue to short.

This of course is all good and well, but there seems (?) to be some people who fundamentally do not understand that the $420 is a floor for sellers but not a ceiling for buyers.

 

[Thekiwi]

When your aquaintances take up a short position they borrow stock, sell it on the open market thus opening a short position. The position will remain open until it's closed. The way the position is closed is by the stock being re-bought in the market. If the stock is bought back at a lower price than where the short position was opened you make money, if the stock is bought back at a higher price yoy lose money on the trade. This I suppose they understand, since this is what shorting is and they're taking part in the pratice.

Now, you should inform your aquintances that the $420 number refers to a price level at which some large financers pledge to buy TSLA stock from current owners of stock who for whatever reason do not wish or are not able to hold on to their stock when Tesla de-lists from the NASDAQ stock exchange. There is absolutely no-one guaranteeing that they will sell TSLA stock at neither $420 nor any other particular price. If (when) the deal goes through that means that $420 is a hard floor for sellers but it is in no way a hard ceiling for buyers. In closing a short position you are not a seller but a buyer. The buyer must pay whatever the market demands. Their potential losses are uncapped and in theory unlimited.

Yes I have heard this theory repeated through the last few days worth of posts. Can you provide an example of a company going private where the stock price has traded above the buyout price before closing?

 

[loky]

Fast checking about possible outcome of voting..

TSLA Major Holders

25.31 % of Tesla Shares is Held by All Insider
39.6 % of Tesla Shares is held by Top Ten Institutional Holders
64.91 % Total

What is the chance for negative outcome of voting ?
Zero , null , nada, ništa, niente..

 

[Remus]

Natural result when they are searching for whatever fits their prejudice and ignore the rest.

I have a hard time understanding why the finance media and shorts can't fathom that it doesn't need to be big banks and big corporations that buy out TSLA. If it's 30-40B that's needed, that's about 2-4 private investors with enough capital (Larry, Sergei etc). Elon would give 3-4 board seats and if the new investors each take 10-20% of the company there is no loss of control or anything else that would make this a bad deal. He's been promised this funding many times over in the past years I don't see him not taking a 10B stake in TSLA with expected long term return being in multiples.

So why is it so unfathomable that Elon has the funding secured? And considering his distaste for wall str I'd say it's pretty logical that it's noone from there...

 

[Johan]

Yes I have heard this theory repeated through the last few days worth of posts. Can you provide an example of a company going private where the stock price has traded above the buyout price before closing?

No. The closests thing is Short sellers make VW the world's priciest firm but then of course that wasn't a pre-announced buy-out offer.

But, what seems confusing for some people here is the fact that there's "going private" and then there's "going private". Often it means a management buy out, or one company buying up another, or one big entity taking over. What Elon is really trying to achieve here is mostly de-listing the company from the stock market. It will still be a public company owned by both small and large shareholders with differing interests - it won't be majority controlled. It might go back on the stock market at some time in the future. What he wants gone is mainly short selling it would seem. Short selling of TSLA is at an unprecendented level for a large cap stock historically, and short selling does keep the price "artificially low". So the more important question you should ask is: "is there and example of a company going private, with a short interest of at least 30%, where the stock price has traded above the buyout price before?". Than answer to that, of course, is also no, since this is unchartered territory.

 

[DriverOne]

edit: understand that I'd love to see a short squeeze

I'm less sure we'll see a squeeze. It seems plenty of people are happy to sell here even at < $380.

If owners in IRAs or other retirement vehicles are forced to sell, that too will of course suppress any squeeze. There will be plenty of TSLA sellers for the shorts to buy from.

 

[Sudre]

No it isn’t. Are you lying on purpose, or are you just being sloppy with your reading? The WSJ reported that it is asking Tesla for information. And it specifically said that it is NOT an investigation, which is what I wrote and what you are commenting on. I said the SEC would quietly ask Tesla for information and then use that to determine whether or not to launch an investigation. Here’s what the WSJ wrote:

“The SEC’s inquiries, which originated from the agency’s San Francisco office, suggest Tesla could come under an enforcement investigation if regulators suspect that Mr. Musk’s statement was misleading or false.”

“Could come under an enforcement investigation if...” ergo they aren’t under one now.

And I agree that if Musk is lying there should be some serious consequences. I am total revamping my TSLA investment to acquire more share before they go private in 6 months to a year. I will end up with less shares than my long term plan which is being abandon. If he is lying I will be pissed. I am extremely confident he is not. I also understand that the move to go private may fall thru if the idiot shorts run the price up too high covering but I have CALLs to cover that too.

 

[bhtooefr]

If owners in IRAs or other retirement vehicles are forced to sell, that too will of course suppress any squeeze. There will be plenty of TSLA sellers for the shorts to buy from.

Forced sales in that case won't be to the shorts, though, they'll be to Musk's financing sources.

That means the floor's still $420, the shorts have to beat that, and that's where a squeeze comes in.

 

[saniflash]

Here's how Elon Musk might put together a deal to take Tesla private


Finally some constructive thinking about how this might happen

 

[lklundin]

When your aquaintances take up a short position they borrow stock, sell it on the open market thus opening a short position. The position will remain open until it's closed. The way the position is closed is by the stock being re-bought in the market. If the stock is bought back at a lower price than where the short position was opened you make money, if the stock is bought back at a higher price yoy lose money on the trade. This I suppose they understand, since this is what shorting is and they're taking part in the pratice.

Now, you should inform your aquintances that the $420 number refers to a price level at which some large financers pledge to buy TSLA stock from current owners of stock who for whatever reason do not wish or are not able to hold on to their stock when Tesla de-lists from the NASDAQ stock exchange. There is absolutely no-one guaranteeing that they will sell TSLA stock at neither $420 nor any other particular price. If (when) the deal goes through that means that $420 is a hard floor for sellers but it is in no way a hard ceiling for buyers. In closing a short position you are not a seller but a buyer. The buyer must pay whatever the market demands. Their potential losses are uncapped and in theory unlimited.

Excellent explanation. For a manager of an investment fund, even one limited to a 7 digit size, this should already be clear.

Nevertheless, the high-profile and self-admitted unsuccessful Tesla shorter Mark BS propagates the obvious falsehood that 420$ is an upper limit on the risk of shorting Tesla:
Mark B. Spiegel on Twitter

- could this be a desperate attempt to lure others into short selling Tesla, giving himself a much needed opportunity to buy back some of his own short sales?

(I am not actually interested in understanding that person, only in how one may try to manipulate the market).

 

[clp1]

when you tell lies others for very long time you start to believe them yourself.


The official notification will be right before shareholders voting round. Shareholders voting round will be postponed as far as possible (1-2 months from now) to let all weak stomach shareholders sell their shares to those who are ready to stay in the private company. One has to be delusional to think otherwise.

This brings me to my question. I'm just a normal blue collar worker, I don't do any trading, shorting, leaping etc. But I do own 73 shares of TSLA that I have been buying over the last 2 years. I saved and not done other things, but instead decided I would buy a few TSLA shares every month. I'm up 40% and have been as high as 50%.
Is it true that you would need to be an "accredited investor" to keep your stocks under current law? Not being able to ride this out another year or even 5 years instead of being forced out at $420 because I'm not rich. That would really suck...

 

[jw934]

Voting shares cannot be lent out

Actually, voting shares can be lent out, but it is just that the lender will not be able to vote while the borrower can. (Exception is if the shares are lent out on the record date, in which case both the lender and the borrower can vote. ) Reference: https://www.mcgill.ca/desautels/files/desautels/Cgmr0704.pdf

The implication is that the number of shares recalled from the shorts prior to the record date depends on the lenders.

Voting shares cannot be lent out

 

[loky]

Major Media Outlets Prove Elon’s Point, Push Tesla To Go Private

Very nice article from CleanTechnica


ps. excuse me, maybe i somehow overlooked it, worth posting again..

 

[dondy]

Is it true that you would need to be an "accredited investor" to keep your stocks under current law? Not being able to ride this out another year or even 5 years instead of being forced out at $420 because I'm not rich. That would really suck...

not necessary.
Musk tweeted:

My hope is *all* current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.

Fidelity type funds are private funds designed for retail investors. Many of them have 0$ min requirements.
It's not the best solution though it's capable to cover most of the client groups in Europe and elsewhere.
I would expect that they will come with public fund to ease concerns of the smallest investors, but I am not going to bet on it.
It would be fair and the best possible exit, but also expensive one in the long run.