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2017 Investor Roundtable: TSLA Market Action

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Yeah, I'm on shaky ground trying to back that one up. I just can't wrap my head around the possibility that any large percentage of that short interest is held by retail investors, so I "assume" that's where it is.

I'm open to suggestions...

My theory is that the short positions are being held by a sizeable number of idiots.
 
Yeah, I'm on shaky ground trying to back that one up. I just can't wrap my head around the possibility that any large percentage of that short interest is held by retail investors, so I "assume" that's where it is.

I'm open to suggestions...

Market makers in options try to neutralize their delta exposure. So when they sell a put they have a positive exposure to the price (if price goes up 1 they make 1*delta.) Selling 2 puts ATM has approx +1 delta, so they counter that by selling short 1 stock of the underlying, giving them a ~0 delta exposure.

That's a very ELI5 explanation - it's not as easy as I outlined and there is a lot of readjustning needed to stay neutral.

Gamma is what gives market makers headaches. It's the measure of how fast delta changes when price changes and is what causes market makers having to readjust as price of the underlying moves.
 
My theory is that the short positions are being held by a sizeable number of idiots.
I suspect at least half the short positions might be held by the present US Secretary of Energy. the current Administrator of the US Environmental Protection Agency and the family of the current US President.
They might have some sort of declarations to make, but they've already made them, so it should not matter.:rolleyes:
 
Market makers in options try to neutralize their delta exposure. So when they sell a put they have a positive exposure to the price (if price goes up 1 they make 1*delta.) Selling 2 puts ATM has approx +1 delta, so they counter that by selling short 1 stock of the underlying, giving them a ~0 delta exposure.

That's a very ELI5 explanation - it's not as easy as I outlined and there is a lot of readjustning needed to stay neutral.

Gamma is what gives market makers headaches. It's the measure of how fast delta changes when price changes and is what causes market makers having to readjust as price of the underlying moves.

I understand hedging with puts (options), but shorting real shares seems to be a way more expensive and risky way to hedge, IMHO.
 
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Details from the Piper Jaffray note, via Barron's Blog:

Tesla’s products have a captivating impact on consumers and shareholders alike; this advantage will be difficult to replicate. In the minds of its customers, employees, and shareholders, Tesla isn’t just another company. More so than any stock we’ve covered, Tesla engenders optimism, freedom, defiance, and a host of other emotions that, in our view, other companies cannot replicate. As they scramble to catch up, we think Tesla’s competitors only make themselves appear more desperate. With this in mind, even if the Model 3 production launch goes badly, we think customers (and more importantly shareholders) will withhold judgment.

We sympathize with bears – but their (arguably rational) arguments probably won’t matter. In many ways, TSLA seems to play by its own rules. The company burns through cash at a rate that better-established companies would likely be crucified for – especially considering TSLA’s rickety balance sheet and penchant for raising equity. Tesla’s production timelines are unreasonably fast, at least based on “expert” opinions in the automotive industry, and the company spurns various industry norms. For instance Tesla has avoided LiDAR in its self-driving systems (which some claim is dangerous), while pursuing a direct sales model that dealerships fiercely oppose. Yet, because of its superior products, loyal shareholders, and inspiring mission, TSLA remains unscathed.
 
Market makers in options try to neutralize their delta exposure. So when they sell a put they have a positive exposure to the price (if price goes up 1 they make 1*delta.) Selling 2 puts ATM has approx +1 delta, so they counter that by selling short 1 stock of the underlying, giving them a ~0 delta exposure.

That's a very ELI5 explanation - it's not as easy as I outlined and there is a lot of readjustning needed to stay neutral.

Gamma is what gives market makers headaches. It's the measure of how fast delta changes when price changes and is what causes market makers having to readjust as price of the underlying moves.

This old thing is a great introduction to options and is written in a language that lets your understand it without prior experience.
Options Analysis by Tompkins, Robert G.
It's somewhat hard to locate, but is way better than the newer literature in my opinion.
 
Elon Musk and Mary Barra return to the White House,...again.

JUST IN: Trump to meet CEOs on Tuesday, including those of GM, Tesla, IBM, Wal-Mart to discuss administration priorities - source

Reuters Business on Twitter

More cancelations & tantrums? :rolleyes:

sjm-tesla-0303-003.jpg
 
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Details from the Piper Jaffray note, via Barron's Blog:
"As they scramble to catch up, we think Tesla’s competitors only make themselves appear more desperate."

Appear?
you mean instantiate--
this is classic massive disruption disbelief playing out before your eyes;
we move from the established industry:
able to crush on a whim,
to scrambling to catch up,
to scrambling appears to be desperation,
to desperation is real,
to, we give...
 
On "the Shorts"
There are frequent comments that "the shorts" aren't covering because we aren't seeing net covering. The narrative is that some poor shorts are sinking deeper and deeper into the red while clinging to the hope that Tesla will tank, and one day if the price gets high enough then they'll cave and cover and we'll all enjoy a big squeeze.

I think this view under-appreciates new short interest. I suspect the shorts are covering, but new shorts are also arriving to keep the net short interest relatively stable. For every person that thought TSLA was way over valued at $180, there might be two that think it's over valued at $310, so it's easy to see new shorts entering.

The important take-away from this, is that the current shorts might not actually be that under water on average - maybe just 10-20%. And even if they do eventually hurt enough to cover, there might just be more new shorts entering to negate a squeeze. A squeeze requires both a high share price AND a reason why new shorts don't want to enter (e.g. VW squeeze).
 
On "the Shorts"
There are frequent comments that "the shorts" aren't covering because we aren't seeing net covering. The narrative is that some poor shorts are sinking deeper and deeper into the red while clinging to the hope that Tesla will tank, and one day if the price gets high enough then they'll cave and cover and we'll all enjoy a big squeeze.

I think this view under-appreciates new short interest. I suspect the shorts are covering, but new shorts are also arriving to keep the net short interest relatively stable. For every person that thought TSLA was way over valued at $180, there might be two that think it's over valued at $310, so it's easy to see new shorts entering.

The important take-away from this, is that the current shorts might not actually be that under water on average - maybe just 10-20%. And even if they do eventually hurt enough to cover, there might just be more new shorts entering to negate a squeeze. Any squeeze isn't going to require only a high share price. It also requires a deterrent for new shorts to enter.

Even if that's true, you're ignoring the effect of having such a high ratio of the shares of the company sold short, compared to the very high ratio of institutional and otherwise never-sell holders like Elon.

We know that Elon currently holds around 22% of the shares, Tencent holds >5% of the shares, and the other institutions hold a combined total of something like 60%. We also know that around 20% of the shares are sold short. 22+5+60 > 100-20, so if the shorts decide to get out all at once, there aren't enough shares available for sale for them to buy. Tencent arriving on the scene changed the calculus for TSLA much like Porsche disclosing its VLKAY position did.
 
Yeah, I'm on shaky ground trying to back that one up. I just can't wrap my head around the possibility that any large percentage of that short interest is held by retail investors, so I "assume" that's where it is.
I think it's so-called "hedge funds". Not the sort which actually hedge (which is now a tiny percentage). But the sort which make risky directional bets (way more common). So, private funds with a lot of dumb money invested in them.

This is just a guess, but those guys do collect a *lot* of money (many billions), and it's *all* dumb money -- the fee structure alone means you typically can't make money investing in a "hedge fund" unless you're the manager.
 
...
We know that Elon currently holds around 22% of the shares, Tencent holds >5% of the shares, and the other institutions hold a combined total of something like 60%. We also know that around 20% of the shares are sold short. 22+5+60 > 100-20, so if the shorts decide to get out all at once, there aren't enough shares available for sale for them to buy.

A danger of that calculus is that you appear to be reasoning that those institutional investors are unshakeable holders of the stock. I will suggest this is a wildly precarious supposition. That fund manager who rides her million-share position up to $700 and then back to $260, without having trimmed w/some profit-taking along such a path, is going to have her head handed to her, as well as the possibility of a pink slip, at many institutions.


===>Just trying to inject a bit of caution here<===
 
Well that would be a reason why new shorts might not want to enter. I don't think its too bad yet, but it might get much more serious.
so to me an answer might be, from a niave investor
1) don't sell my positions
2) don't sell covered calls
3) continue to eek out buying shares in my DCA account, voting my "pebbles in the avalanche"
4) take a few profits to both lower my share cost basis and pay for part of my model 3
5) use #4 to get more "pebbles"
 
Even if that's true, you're ignoring the effect of having such a high ratio of the shares of the company sold short, compared to the very high ratio of institutional and otherwise never-sell holders like Elon.

We know that Elon currently holds around 22% of the shares, Tencent holds >5% of the shares, and the other institutions hold a combined total of something like 60%. We also know that around 20% of the shares are sold short. 22+5+60 > 100-20, so if the shorts decide to get out all at once, there aren't enough shares available for sale for them to buy. Tencent arriving on the scene changed the calculus for TSLA much like Porsche disclosing its VLKAY position did.
So first of all, the 20% sold short creates additional float. So it's really 120% - 20%; there are enough shares for them to buy.

In addition, some of the institutions are definitely holding their shares available for sale at fairly low prices; some have been trading in and out. I did a bottom-up calculation trying to figure the attitude of individual institutions, and came up with a "long term holding" total of at least 54% (including the 22 + 5). So the percentage of shares outstanding held long-term is probably somewhere between 54% and 87%. But again, there are 120% of the shares outstanding trading, thanks to shorts, so they can buy 'em back.

It should scare the short-sellers, though. The long-term holders have had a tendency to accumulate. Tencent is almost certainly buying more. Fidelity Contrafund and Fidelity OTC have historically kept buying more; Bailie Gifford has historically kept buying more; Ron Baron has already said he's buying as much as he's allowed to within the restrictions of his fund styles. So if any of them have inflows of investor funds, expect more long-term purchases from them. If the percentage held long-term keeps creeping up like this, and the percentage sold short keeps increasing, eventually we would see 100.1% of the shares outstanding held long-term, with (for example) 20% sold short and only 19.9% actively trading (entirely from the shares sold short!) and then you get an actual honest-to-god short squeeze (liquidity goes to zero and price goes to infinity). (This actually poses a risk for anyone lending their shares to short-sellers; some of them won't get their shares back.)

I consider this unlikely for four reasons. One, the SEC dislikes actual short squeezes and tries to avoid them. Two, good grief, most shorts should see the risk coming before then and start covering. Three, people lending their shares to short-sellers will see this coming and recall their shares. Four, the brokers should see the risk coming and start forcibly closing short positions. This would cause a *short covering rally* like we saw in 2013, which is not technically the same thing as a short squeeze. We should see skyrocketing rates to borrow TSLA before that happens.

I've been wondering why we haven't seen such rates (which we did see repeatedly from 2012 to 2016), and my theory is that *this* time there are a lot of longs buying TSLA on margin who are therefore lending their shares out for no compensation. Their shares, bought on borrowed money, are by definition short term and available for sale. If they deleverage, pay off their margin loans and go all cash, their remaining shares will be long term, and I think that has to happen before we see the interest rate on borrowing TSLA go back up.
 
A danger of that calculus is that you appear to be reasoning that those institutional investors are unshakeable holders of the stock. I will suggest this is a wildly precarious supposition. That fund manager who rides her million-share position up to $700 and then back to $260, without having trimmed w/some profit-taking along such a path, is going to have her head handed to her, as well as the possibility of a pink slip, at many institutions.


===>Just trying to inject a bit of caution here<===

Well yes, some fraction of those institutional holders are willing to sell much lower than others. The question is: how much short interest exceeding float can it take? What you're suggesting is simply that some amount of the float is 'squishy' for lack of a better word. Most of those institutional shareholders intend to hang onto the majority of their position until $1T cap or something. You're right though - the higher it goes, the squishier it gets.

I don't expect any valuation convinces Elon to sell any of his 22%.

VLKAY's big squeeze was instigated by short interest exceeding the float by only around 5%. TSLA is currently exceeding it by more than that (though the float is a bit squishier since there are more softer holders involved).
 
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