Elon Musk vs. Short sellers

[jeewee3000]

I remain skeptical of a VW-like-squeeze.

I do agree at a certain point nobody will want to sell below $420 if the deal would go through, but many a trader would sell at $450 or $500 in an effort to take profits off the table and buy back in at $420.

Therefore I do not see the price shooting up to +$1000 because "nobody" wants to sell. There is always a seller. Even I - with the intention of buying and holding - will sell at a certain spiked stock price, just to buy back in later. I am only human.

 

[Sancho]

I remain skeptical of a VW-like-squeeze.

I do agree at a certain point nobody will want to sell below $420 if the deal would go through, but many a trader would sell at $450 or $500 in an effort to take profits off the table and buy back in at $420.

Therefore I do not see the price shooting up to +$1000 because "nobody" wants to sell. There is always a seller. Even I - with the intention of buying and holding - will sell at a certain spiked stock price, just to buy back in later. I am only human.

No guarantee that you can buy back in at $420.

I am also skeptical of a VW squeeze. But it seems likely to me that demand and supply are going to bring the SP over $500 prior to closing of TESLAP.

 

[WarpedOne]

... and buy back in at $420

Who from?

 

[jeewee3000]

Who from?

That's the risk you would have to take. Might be getting back in at $435 after selling at $490 for example.

 

[WarpedOne]

I feel some people have moot understanding of what exactly a "buy offer" really means.

Tesla will not be buying shares at the market for $420, they will only announce a 'conversion date'.
When the day comes all the "I'm in" people will get their public shares automatically converted into private shares.
And all the "I'm out" will get their public shares automatically converted into cash @420/share.

Anyone wanting back in a few days before that date will have to buy at the market from someone who is staying out and cannot wait a few more days.
This is not a risk, this is madness.

 

[CatB]

I feel some people have moot understanding of what exactly a "buy offer" really means.

Tesla will not be buying shares at the market for $420, they will only announce a 'conversion date'.
When the day comes all the "I'm in" people will get their public shares automatically converted into private shares.
And all the "I'm out" will get their public shares automatically converted into cash @420/share.

Anyone wanting back in a few days before that date will have to buy at the market from someone who is staying out and cannot wait a few more days.
This is not a risk, this is madness.

In other words, I could decide that I want to keep the majority of my shares as TSLAP, but I wouldn’t mind a little liquidity or a tidy profit, so I could put in a sell order for 5 shares with a limit price of $2000 because $10K now might be nice for me, and someone may want to get in before they miss their chance to own a piece of the future. If someone puts in a “buy market” order, I win - and hopefully it’s a win/win, not an “oh sugar” moment.

 

[winfield100]

I feel some people have moot understanding of what exactly a "buy offer" really means.

Tesla will not be buying shares at the market for $420, they will only announce a 'conversion date'.
When the day comes all the "I'm in" people will get their public shares automatically converted into private shares.
And all the "I'm out" will get their public shares automatically converted into cash @420/share.

Anyone wanting back in a few days before that date will have to buy at the market from someone who is staying out and cannot wait a few more days.
This is not a risk, this is madness.

i might be willing to sell 1-3 odd shares @$2,500+/share, maybe, so my grandkids inherit the vast bulk
embrace the "madness"
How much FUD can the media make?

 

[WarpedOne]

i might be willing to sell 1-3 odd shares @$2,500+/share, maybe, so my grandkids inherit the vast bulk
embrace the "madness"

Yes, there will be plenty of us 'vultures' with sell orders at many-multiples of 420 for a tiny number of shares.
Those willing to let go of their shares will do so long before the conversion date.

 

[DriverOne]

There will be a squeeze of the shorts depending on the certainty of the deal going through. When it is 99% certain, that the deal goes through for 420$, nobody will want to sell below 420$...

Not quite. Depends on the date. Say the deal is $420 will close August 2019. Plenty of people will sell for less than $420 before then. The price will approach $420 as August nears.

 

[Ellec]

Good thread.

The key pieces of information that will determine the extent of the squeeze are:

1. The number of shares long that won't or can't go private.
2. The number of shares short
3. The date when going private is viewed by the market as highly probable (95%)
4. The date Tesla goes private.
5. The number of current or new investors who want to buy shares in order to go invest in a private Tesla.
6. Are there a significant amount of calls that can be exercised above the $420 (if price goes above the strike)

These things are all unknown and/or are dynamic but if the ingredients are there for a VW like squeeze * 10.

Another issue with the $420 price is that it may look reasonable now, but if the deal doesn't go through till Q3 2019 Tesla could have 2-3 quarters of profits behind and likely should be trading around $600.

 

[neroden]

I feel some people have moot understanding of what exactly a "buy offer" really means.

Tesla will not be buying shares at the market for $420, they will only announce a 'conversion date'.
When the day comes all the "I'm in" people will get their public shares automatically converted into private shares.
And all the "I'm out" will get their public shares automatically converted into cash @420/share.

Anyone wanting back in a few days before that date will have to buy at the market from someone who is staying out and cannot wait a few more days.
This is not a risk, this is madness.

The way the short-sellers can get out by staying to the end is this. The *institution which is lending them their shares* intends to get out at $420. In order to keep the business of the short-sellers, the institution generously agrees to accept $420 (maybe plus a little) instead of getting their shares back.

This can basically only be done by an actual brokerage which is lending *its own* shares, rather than shares held in a customer's margin account, securities-lending-fully-paid account, or similar. Mutual funds would each individually have to have their trustees decide to do it; the whole brokerage couldn't decide on their behalf.

The institution may choose to do this because it likes the business from the money-losing short-sellers and wants to keep them on the hook a bit longer to pay interest on another ill-advised short-sale.

The bigger issue, however, is options market makers. They may be short-selling to hedge their options positions, but they end up in the same potentially-squeezed position as retail short-sellers; they would have to line up a lender who would guarantee them that it wouldn't ask for its shares back, and that's risky for them. They might stop short-selling to hedge, and change the options premiums to make up the difference. Since they short-sell stock when retail buyers buy puts (or sell calls), they're fine if there are more bulls than bears in the options markets (they'll be long stock in that case).

If there are more bears than bulls in the options markets, however, the options makers should jack up the price of puts (to discourage purchases) and shove down the price of calls (to discourage sales).

 

[winfield100]

Good thread.

The key pieces of information that will determine the extent of the squeeze are:

1. The number of shares long that won't or can't go private.
2. The number of shares short
3. The date when going private is viewed by the market as highly probable (95%)
4. The date Tesla goes private.
5. The number of current or new investors who want to buy shares in order to go invest in a private Tesla.
6. Are there a significant amount of calls that can be exercised above the $420 (if price goes above the strike)

These things are all unknown and/or are dynamic but if the ingredients are there for a VW like squeeze * 10.

Another issue with the $420 price is that it may look reasonable now, but if the deal doesn't go through till Q3 2019 Tesla could have 2-3 quarters of profits behind and likely should be trading around $600.

I'm still intrigued by a possibility I keep stumbling across
7. Tesla "delists" but stays public
IF I understand it, that forces shorts to close out, and Tesla can only allow selling at certain rare time periods, but allow buying of only already shareholders or vouched for folks and no options, esoterics, "the hammer of Ghod" descends on folks who try so and they are summerily evicted with a pre agreed upon penalty.
I apologize if this has been discussed

 

[Boomer19]

Tesla Adversaries

This New Yorker article has connected the dots for me.

Paul Singer, Doomsday Investor

I think many of Tesla shorts are emulating Elliott’s modus operandi. Also EMC itself is heavily invested in oil and energy and therefor has interest in slowing Tesla down. Character assassination tactics, lawsuits and overall FUD feels familiar if you follow Tesla.

good post from vitold, interesting read to say the least.

 

[lolachampcar]

Again, I really do wish all money was earned (by adding value).

 

[Mich]

Beside all short positions which needs to be closed before de-listing also all options need to be closed.There are tons of ITM open instrest of options. What's the impact there?

 

[neroden]

Beside all short positions which needs to be closed before de-listing also all options need to be closed.There are tons of ITM open instrest of options. What's the impact there?

They don't need to be closed. Long call holders can execute (and collect stock) if they want to. Long put holders can execute (and sell stock to the short put holders) if they want to. The rest of the options just expire.

 

[Johan]

Beside all short positions which needs to be closed before de-listing also all options need to be closed.There are tons of ITM open instrest of options. What's the impact there?

Like @neroden says they don't have to be closed. However, if you hold an in-the-money call option very close to the de-listing date or on the day of the de-listing presumably it has value and will be either exercised or sold to someone who exercises it.

If the seller of the call option holds TSLA as security those will be called away.

The interesting thing of course if what happens if the seller/issuer of the call option doesn't have the TSLA shares or never had any to begin with. That situation is very akin to naked shorting, at least indirectly. Presumably the broker will require cash as security, and the amount being in proportion to the price of the stock. Here of course the short squeeze dynamics could come in to play.

Also it's my belief (correct me if I'm wrong) that many calls are being sold by the market makers, where no one necessarily knows if they hold enough TSLA at any given time to secure all the calls they have in play. My suspicion is they don't (just like how for example any bank will crash should all customers simultaneously want to withdraw all their holdings). Selling calls and puts and making many off the spread and time decay is sort of the bread and butter business of market makers. Typically "the house always wins" over time. But this isn't at all a typical situation....

 

[neroden]

People selling naked calls could end up "naked short sellers". The brokerages will probably force them out first; the brokerages can unilaterally raise the collateral requirements to be very high, to protect themselves.

The options clearinghouse doesn't want to be on the hook for failed transactions, so it would be very unhappy if someone exercised a call and was unable to get the stock. (The clearinghouse is required to make the call executer whole.)

The market makers are the interesting point; they are only doing partial hedging of their options positions and could be in trouble if "caught short". They want to end up, ideally, in a completely neutral position neither short nor long any options. If they can't do that, they'd want to be long ITM calls and short ITM puts. If they can't do that, they want to have a net short call positions backed by stock...

 

[jhm]

People selling naked calls could end up "naked short sellers". The brokerages will probably force them out first; the brokerages can unilaterally raise the collateral requirements to be very high, to protect themselves.

The options clearinghouse doesn't want to be on the hook for failed transactions, so it would be very unhappy if someone exercised a call and was unable to get the stock. (The clearinghouse is required to make the call executer whole.)

The market makers are the interesting point; they are only doing partial hedging of their options positions and could be in trouble if "caught short". They want to end up, ideally, in a completely neutral position neither short nor long any options. If they can't do that, they'd want to be long ITM calls and short ITM puts. If they can't do that, they want to have a net short call positions backed by stock...

I think the key thing to wrestle with here is the declining value of puts struck below $420. As the transaction becomes certain, writing these puts becomes an arbitrage play. Plenty of traders will be quite willing to sell to-be-worthless puts to any fool looking to stay short in Tesla. Indeed Musk and other private investors could sell puts to raise cash for the cash-out option on public shares.

So why would shorts continue to borrow shares when puts are incredibly cheap and have zero short squeeze risk? My outlook is that bears will pile into puts, and this will largely diffuse a short squeeze. This could all end, not with a bang, but a whimper.

Right now you buy a Jan 20 420 put for $130, such a bargain! Get'em while supplies last.

 

[TheTalkingMule]

UBS is on CNBC pretty much every day now with some analyst spouting nonsense the their "tear-down". Now it's quality issues like missing bolts and uneven gaps.

At what point does this become illegal? I mean we have one entity paying a media outlet for airtime to spread obviously fabricated stories to move a stock price. There should be a clear line between "I feel this company is financially unsound" and "this car is falling apart".