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Short Squeeze Strategy
- Thread starter sweter
- Start date
I tend to be over optimistic but a "short burn of the century" *should* go to 1500 or above:
- "tsuname of hurd" was a x5 in stock price
- VW 2008 short squeeze was also a x5 in stock price.
The upcoming burn should be larger and "next level" compared to these two examples.
So my stops are around 1300 to 2000 just in case of a very fast pop. If we have a slow ride I can think of selling on the way up and decide in time.
- "tsuname of hurd" was a x5 in stock price
- VW 2008 short squeeze was also a x5 in stock price.
The upcoming burn should be larger and "next level" compared to these two examples.
So my stops are around 1300 to 2000 just in case of a very fast pop. If we have a slow ride I can think of selling on the way up and decide in time.
Stretch2727
Engineer and Car Nut
I have sell limit orders for a portion of my position at $1000, $1250, $1500 in case there is a huge VW like run up of the stock. If it sells at these levels I will be fine...I expect that I can buy back at some point but still will have made 7-8X my original cost.
I can't see how $1000 is a good sell point if you intend to buy back in. Depending on your share history and tax burden, the stock would have to fall to between let's say $750 and $550 just to break even after taxes. It would probably settle north of after 500 after the short squeeze ends. Of course the less of you that set limit orders, the higher the short squeeze goes.
Stretch2727
Engineer and Car Nut
I've made my bets: 20% of my current holding at 0.5x intervals of SP price from last day of the quarter, starting from 2.5x. Which translates to:
2.5x: 857.38
3.0x: 1028.85
3.5x: 1200.33
4.0x: 1371.80
For base price I waited for the closing SP of last day of the quarter. Had to decide on a point in time in case for some reason things start to move early (early numbers release or another announcement) on this and this seemed the most natural.
I started at 2.5x because I think anything below that might become a sustainable price and as a long I'm not satisfied with selling at 2x.
I decided to go up to 4x because that's (roughly) how the VW squeeze day went.
I also find it very unlikely that a squeeze of this size will happen. I will be very surprised if even one of these will trigger, maybe except for the 2.5x one (unfortunately my broker forces max expiry date of July 30th). However, it's better to be prepared and profit than be driven by emotions and urgency if it actually happens. In the end investing is about making profit and I think it would be a waste not to use this opportunity (as unlikely as it is).
After things settle down I intend to fully buy back and stay long doubling (or even tripling?) my position. I'm guessing it would settle somewhere between the current SP and 2.5x.
2.5x: 857.38
3.0x: 1028.85
3.5x: 1200.33
4.0x: 1371.80
For base price I waited for the closing SP of last day of the quarter. Had to decide on a point in time in case for some reason things start to move early (early numbers release or another announcement) on this and this seemed the most natural.
I started at 2.5x because I think anything below that might become a sustainable price and as a long I'm not satisfied with selling at 2x.
I decided to go up to 4x because that's (roughly) how the VW squeeze day went.
I also find it very unlikely that a squeeze of this size will happen. I will be very surprised if even one of these will trigger, maybe except for the 2.5x one (unfortunately my broker forces max expiry date of July 30th). However, it's better to be prepared and profit than be driven by emotions and urgency if it actually happens. In the end investing is about making profit and I think it would be a waste not to use this opportunity (as unlikely as it is).
After things settle down I intend to fully buy back and stay long doubling (or even tripling?) my position. I'm guessing it would settle somewhere between the current SP and 2.5x.
ValueAnalyst
Closed
I don't think the math is that simple. Recalling a share from lending closes out the short position, but it also closes out the second long position.
You are also assuming that, if and when TSLA rises as shorts buyback their shares, the remaining longs will not sell or reduce their shares.
So I initially read the title of this thread a bit differently.Humor me.
If we credit Jesselivenomore's analysis and assume that a large group of short-sellers are actually trying to kill Tesla by starving it of capital, the only time this will matter is when the 2019 convertible bonds need to be paid or converted on March 1, 2019. The decision date for convertible holders turns out to be February 27, 2019, two days earlier.
Accordingly, the correct strategic move to prevent a bear raid if the stock price is anywhere below or near $360 is for all long holders to recall all shares from share lending programs sufficiently before that. (And those who are leveraged should pay off all margin loans, preferably by selling other stocks, so that their TSLA can't be loaned out by the broker either.)
It can take up to two business days to recall shares. The market makers may have up to 13 business days to re-locate shares (during that time, "naked shorts" may exist). Adding another day to allow the market to actually react, recalls would need to start on February 4th, 2019.
It would probably be most reliable to recall them at least a few days earlier, during January 2019. Too many weeks before that and the short sellers might find a way to refinance themselves
I'm happy to take money from short sellers but I won't allow them to put Tesla in a bad financial position, so that's when I'm going to recall my shares.
can you, or someone else, please explain further, the mechanics of the mar 2019 bond maturity? i think it would benefit everyone here, considering this is a major event upcoming and not to be overlooked. maybe even a separate thread on it for easy access. i obviously get what you’re saying above and have seen a couple other times you’ve but mentioned this.. trying to understand it in lehman’s terms to my friends - did search some post history but couldn’t find every detail.
sorry if annoying.
basically looking for explanation of the maturity (total principal plus interest) and the conversion ratio - and how the opposite side of the trade is trying to play it as well.
thanks to all involved!!!
truly, boomer the driving dog
OK. So here's the *basics*.
(1) There are $920 million of Mar 2019 bonds. They are convertible. If the stock price is above $360.32, it makes financial sense for the bondholders to convert them to stock. (This is newly-issued, dilutive, stock issued by Tesla.) If not, it makes financial sense for the bondholders to demand cash. If they convert, this converts debt into equity; it is essentially an equity capital raise for Tesla without all the drama and fees of an underwritten stock issuance. If not, Tesla has to pay up, $920 million in cash. It could be significant to Tesla's working capital levels.
Note that $360.32 is a correction to my earlier calculation; I forgot that conversion forgoes the last interest payment. Anyway, this is the critical price.
(2) These bonds have a rather complicated set of rules regarding the exact mechanics of the conversions, which I tried to explain, but you should read it for yourself.
Here's one of the prospectus supplements which has most of the rules:
424B5
Find and read the whole prospectus for the gory details.
The most important point is that bondholders need to decide whether to convert in advance of maturity, specifically by February 27th. They can decide to convert earlier. Conversion before September 30 is unlikely because there's an interest payment due on September 30th. They could convert any time between October 1 and February 27th.
They will decide based on the stock price in the weeks before February 27th.
(3) The bondholders are probably hedged in some complicated way but that is beyond the scope of this post.
(4) Tesla has a funky hedge which amounts to prepaid call options, so if the shares are above $360.32 but below $467.83, then the stock issuance is not dilutive (some bank has to hand the same amount of stock to Tesla).
----
The rest of what I wrote was regarding the timing of withdrawing stock from lending programs if you want to make sure that short sellers have to actually buy to cover. If you want to make sure they have to buy to cover early enough to affect the stock price before Feburary 27th, it turns out you have to withdraw your shares from lending programs by February 4th or earlier.
(1) There are $920 million of Mar 2019 bonds. They are convertible. If the stock price is above $360.32, it makes financial sense for the bondholders to convert them to stock. (This is newly-issued, dilutive, stock issued by Tesla.) If not, it makes financial sense for the bondholders to demand cash. If they convert, this converts debt into equity; it is essentially an equity capital raise for Tesla without all the drama and fees of an underwritten stock issuance. If not, Tesla has to pay up, $920 million in cash. It could be significant to Tesla's working capital levels.
Note that $360.32 is a correction to my earlier calculation; I forgot that conversion forgoes the last interest payment. Anyway, this is the critical price.
(2) These bonds have a rather complicated set of rules regarding the exact mechanics of the conversions, which I tried to explain, but you should read it for yourself.
Here's one of the prospectus supplements which has most of the rules:
424B5
Find and read the whole prospectus for the gory details.
The most important point is that bondholders need to decide whether to convert in advance of maturity, specifically by February 27th. They can decide to convert earlier. Conversion before September 30 is unlikely because there's an interest payment due on September 30th. They could convert any time between October 1 and February 27th.
They will decide based on the stock price in the weeks before February 27th.
(3) The bondholders are probably hedged in some complicated way but that is beyond the scope of this post.
(4) Tesla has a funky hedge which amounts to prepaid call options, so if the shares are above $360.32 but below $467.83, then the stock issuance is not dilutive (some bank has to hand the same amount of stock to Tesla).
----
The rest of what I wrote was regarding the timing of withdrawing stock from lending programs if you want to make sure that short sellers have to actually buy to cover. If you want to make sure they have to buy to cover early enough to affect the stock price before Feburary 27th, it turns out you have to withdraw your shares from lending programs by February 4th or earlier.
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OK, so further followup on possible actions by the "opponents" of the stock price rising, in relation to the convertible bonds:
(1) If Jesselivenomore's theory is correct and short-sellers are trying to starve Tesla of capital, they will do whatever they can to force Tesla to make that $920 million repayment rather than just issuing stock.
The other category:
(2) Many buyers of convertible bonds are arbitrageurs. They purchase the bond, and then treat it as a combination of a call option and a normal bond (which it basically is). The *simplest* version of this arbitrage is that they then sell a call option at the same strike price as the conversion price (or slightly higher -- in this case it would be $360), and it's effectively a covered call because if it executes, the bond will also convert. If not, they get the premium from selling the call, and they get the bond interest, and if the pricing is right for them they make money. (There are more complicated arbitrage schemes involving different expiration dates and strike prices for calls which I frankly don't understand, and these are more common in real life, but they're all based on this principle.)
Now here's where it gets theoretical:
(3) The sale of covered calls against *$920 million* of stock is probably not balanced by retail investor purchases of calls. (It should be about 25555 call options -- a lot.) It causes the options market makers, who have to take the other side of the call option deal, to buy a whole lot of calls. This is theoretical. Maybe retail buyers do buy all these options. I could be totally wrong about this. I will note the presence of unusually high open interest in $350 Jan 2019 calls, but maybe that's just retail investors...
(4) The options market makers don't study individual stocks at all generally. They just bought calls from the arbitrageurs, which go down in value if TSLA goes down, so they want to hedge against Tesla going down; they can't do their hedge with options while still making an options market, so they hedge by short-selling (a different amount of) Tesla stock. Right now the option price only moves about half as fast as the stock price, so they'd be short about half as much stock -- $460 million of TSLA stock.
As the stock price goes up, these options market makers have to short more stock -- this is called "dynamic delta hedging" if I remember correctly -- until they're shorting an amount of stock equal to the amount of exposure from the calls (which is equal to the amount of stock which the convertible bonds convert into). They exert a downward pressure on the stock price whenever it rises up and an upward pressure when it sinks down. This pressure is strongest when the stock is near $360, and once the price is far away from it in either direction, there's less re-hedging by the market makers and it doesn't have as much impact. So I think there's a sort of $360 magnet which starts weakening at $400.
Of course this all goes away on March 1 one way or the other.
(1) If Jesselivenomore's theory is correct and short-sellers are trying to starve Tesla of capital, they will do whatever they can to force Tesla to make that $920 million repayment rather than just issuing stock.
The other category:
(2) Many buyers of convertible bonds are arbitrageurs. They purchase the bond, and then treat it as a combination of a call option and a normal bond (which it basically is). The *simplest* version of this arbitrage is that they then sell a call option at the same strike price as the conversion price (or slightly higher -- in this case it would be $360), and it's effectively a covered call because if it executes, the bond will also convert. If not, they get the premium from selling the call, and they get the bond interest, and if the pricing is right for them they make money. (There are more complicated arbitrage schemes involving different expiration dates and strike prices for calls which I frankly don't understand, and these are more common in real life, but they're all based on this principle.)
Now here's where it gets theoretical:
(3) The sale of covered calls against *$920 million* of stock is probably not balanced by retail investor purchases of calls. (It should be about 25555 call options -- a lot.) It causes the options market makers, who have to take the other side of the call option deal, to buy a whole lot of calls. This is theoretical. Maybe retail buyers do buy all these options. I could be totally wrong about this. I will note the presence of unusually high open interest in $350 Jan 2019 calls, but maybe that's just retail investors...
(4) The options market makers don't study individual stocks at all generally. They just bought calls from the arbitrageurs, which go down in value if TSLA goes down, so they want to hedge against Tesla going down; they can't do their hedge with options while still making an options market, so they hedge by short-selling (a different amount of) Tesla stock. Right now the option price only moves about half as fast as the stock price, so they'd be short about half as much stock -- $460 million of TSLA stock.
As the stock price goes up, these options market makers have to short more stock -- this is called "dynamic delta hedging" if I remember correctly -- until they're shorting an amount of stock equal to the amount of exposure from the calls (which is equal to the amount of stock which the convertible bonds convert into). They exert a downward pressure on the stock price whenever it rises up and an upward pressure when it sinks down. This pressure is strongest when the stock is near $360, and once the price is far away from it in either direction, there's less re-hedging by the market makers and it doesn't have as much impact. So I think there's a sort of $360 magnet which starts weakening at $400.
Of course this all goes away on March 1 one way or the other.
" Since we expect to settle in cash the principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25% Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022, we use the treasury stock method when calculating their potential dilutive effect, if any."
The Free Conversion period begins on December 1, 2018. In order for a 2019 note holder to be able to convert on October 1, the share price will have to close above $425.75 for 20 of the last 30 trading days in 3Q18.
Correction taken regarding the conversion timing period. If the stock is over the magic number any time after December 1, I would expect some immediate conversions (because any conversion skips the last interest payment, so there's no point in waiting). Though if the bond continues to trade with option time value, maybe people would wait.
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