Short-Term TSLA Price Movements - 2016

[dakh]

"Shorts" can't vote. They don't own anything. They have sold $TSLA stock they don't own (they "borrowed" shares to sell) and the only way to close out their position is to buy back the same number of shares they sold at some point in the future.

EDIT: And even when they buy it back at some point in the future, they still don't own anything - they are just replacing the shares they previously borrowed to sell.

Mike

The way I understood the article liked up the thread is one can sell short and buy those same shares long to gain voting rights, then exit the long position after casting a vote and then take profits on the short side after the vote goes against company management.

 

[Fast Laner]

quite off topic:

some fireworks for todays SP action from cologne jul 16th:

Kölner Lichter 2016 - Das Feuerwerk - Sendung - Video - Mediathek - WDR

 

[ruralectric]

Has anyone's broker significantly increased the margin requirement for SolarCity over the past few weeks? I wonder if Brokers might increase the margin requirement by some crazy figure to try and force people to sell. Is this possible?

I received a notice from Schwab this morning before the market opened: The rate paid to borrow SCTY shares has dropped from 40% to 34%.

 

[NOLA_Mike]

The way I understood the article liked up the thread is one can sell short and buy those same shares long to gain voting rights, then exit the long position after casting a vote and then take profits on the short side after the vote goes against company management.

I'm assuming that as long as the big institutions recall their loaned shares to vote them there won't be many available to borrow. I'm also assuming that it's one share, one vote and not the Chicago way of vote early and vote often.

I wonder where Elon's shares are? Safely tucked away somewhere or on the open market for borrowing?

 

[JBRR]

Ihor Dusaniwsky on Twitter

"Tesla Shorts Running Out of Juice $TSLA $SCTY #tesla #solarcity @ChrisB_IG http://www.s3partners.net @S3Partners"

 

[generalenthu]

Hypothetically, if someone owns 5 September $30 calls, those 5 calls are worth ~$325. How do (options contract conversions?) work since it's not possible to own half of a contract. Would this mean Tesla calls would adjust to reflect the new contracts? Is there info on investopedia or another website about (options conversions?) assuming that's the right term, work with this type of situation? Is there a formula?

If the merger occurs at a price of $30, but the price of SolarCity's stock hypothetically jumps to $100 due to share recalls, and other factors that are temporary, how does this effect the merger? Does it?

SCTY calls become calls on a basket. Likewise for puts. What is in the basket you ask? Simply it is whatever TSLA offers for SCTY. 0.122 shares or 0.131 shares or whatever else is finally agreed on. Your options then become TSLA1 options or some such, where TSLA1 is = 0.122 shares of TSLA for instance. If it were a cash + stock offer, it would be an option on a basket comprising cash + stock. Works beautifully, until you want liquidity and see these are really thinly traded.

OCC publishes these Option contract adjustment notices here after the transaction goes through.

 

[esk8mw]

Hypothetically, if someone owns 5 September $30 calls, those 5 calls are worth ~$325. How do (options contract conversions?) work since it's not possible to own half of a contract. Would this mean Tesla calls would adjust to reflect the new contracts? Is there info on investopedia or another website about (options conversions?) assuming that's the right term, work with this type of situation? Is there a formula?

If the merger occurs at a price of $30, but the price of SolarCity's stock hypothetically jumps to $100 due to share recalls, and other factors that are temporary, how does this effect the merger? Does it?

My understanding (and someone please correct me if I'm wrong) is that the strike price and number of contracts adjusts according to the conversion formula. e.g., if you have 30 strike SCTY calls and the deal goes off at 30, you'd now have TSLA calls with a strike equal to TSLA's current price, but the number of options would be multiplied by the conversion factor (.122 or whatever). I'm assuming fractionals would have to be closed out and the cash would be sent to you.

So, if you had one SCTY 30 call and deal goes off at $30 with a .12 conversion ratio, you'd have .12 TSLA current price (call it 250) strike call. Assume an at the money TSLA call is worth $20. They'd close it out and you'd get $20 * .12 = 2.4 * 100 = $240.

NOTE: I'm not 100% sure on this. Please contact your friendly neighborhood tax advisor to be sure!

 

[Crowded Mind]

We have been discussing the SCTY option play in the trading thread.

TSLA Trading Strategies - Post 946

I acted on this in a very small way this morning.

 

[generalenthu]

My understanding (and someone please correct me if I'm wrong) is that the strike price and number of contracts adjusts according to the conversion formula. e.g., if you have 30 strike SCTY calls and the deal goes off at 30, you'd now have TSLA calls with a strike equal to TSLA's current price, but the number of options would be multiplied by the conversion factor (.122 or whatever). I'm assuming fractionals would have to be closed out and the cash would be sent to you.

So, if you had one SCTY 30 call and deal goes off at $30 with a .12 conversion ratio, you'd have .12 TSLA current price (call it 250) strike call. Assume an at the money TSLA call is worth $20. They'd close it out and you'd get $20 * .12 = 2.4 * 100 = $240.

NOTE: I'm not 100% sure on this. Please contact your friendly neighborhood tax advisor to be sure!

Nopes, see my note above. Your 30 strike SCTY calls will become 30 Strike TSLA1 calls, where TSLA1 = 0.122 TSLA. No fractionals / cash outs.

 

[Crowded Mind]

Nopes, see my note above. Your 30 strike SCTY calls will become 30 Strike TSLA1 calls, where TSLA1 = 0.122 TSLA. No fractionals / cash outs.

When speaking with Fidelity this morning, they said that fractionals would likely be cashed out. So if 1 SCTY option grants you the right to buy 100 shares of SCTY, and 100 shares of SCTY becomes 12.2 shares of TSLA, then the TSLA1 option would be for 12 shares and the .2 would be cashed out. Please note I am trading this speculatively and have not traded a situation like this before.

 

[tinm]

Infuriatingly misleading FUD from Jalopnik.

http://jalopnik.com/no-tesla-you-aren-t-a-special-special-snowflake-1784263215

 

[generalenthu]

When speaking with Fidelity this morning, they said that fractionals would likely be cashed out. So if 1 SCTY option grants you the right to buy 100 shares of SCTY, and 100 shares of SCTY becomes 12.2 shares of TSLA, then the TSLA1 option would be for 12 shares and the .2 would be cashed out. Please note I am trading this speculatively and have not traded a situation like this before.

The cash out happens at the time you take delivery of your TSLA1 basket, as fractional TSLA shares cannot be delivered. There is no need to deal with fractionals as you will have the same number of options before and after the transaction. This will be moot if you plan to sell your TSLA1 options before taking delivery.

I guess we are saying the same thing.

 

[esk8mw]

Nopes, see my note above. Your 30 strike SCTY calls will become 30 Strike TSLA1 calls, where TSLA1 = 0.122 TSLA. No fractionals / cash outs.

Economically I think we end up in the same place - I just applied the conversion factor to the number of calls as opposed to the number of shares represented by the call like you did. Your way makes more sense and appears correct; as it limits the fractional cash out until exercise (which rarely happens). Thanks for the correction.

 

[sunhelm]

This is what I've thought for the longest time. But the WSJ article I linked to earlier shows how this is done. You can borrow the shares without selling it short. Vote using the borrowed shares and then short the stock (or not) after the record date.

Practically, these are not shorts that are voting, but anybody who goes to this length is very interested in the outcome and are most likely existing shorts in TSLA's. To be fair, even longs might do this.

In reality, this is hard (but not impossible) to pull this off for retail investors. Big hedge funds intent on moving the stock could do this. I very much doubt this could be done with TSLA, just given its size and the public visibility of the vote. Interestingly, the very existence of a big short position makes this less likely to happen because borrow is tight.

What would be a practical reason to borrow shares (at very high interest) and hold it long versus just outright purchasing from the open market from willing sellers at market or your stated limit price ?

 

[Crowded Mind]

The cash out happens at the time you take delivery of your TSLA1 basket, as fractional TSLA shares cannot be delivered. There is no need to deal with fractionals as you will have the same number of options before and after the transaction. This will be moot if you plan to sell your TSLA1 options before taking delivery.

I guess we are saying the same thing.

I think we were saying slightly different things, I don't think I had a firm understanding of when the cashout would happen. I was assuming during the option conversion vs. you are saying at option exercise. Yours makes more sense, I think.

 

[vgrinshpun]

What would be a practical reason to borrow shares (at very high interest) and hold it long versus just outright purchasing from the open market from willing sellers at market or your stated limit price ?

Belief by the potential short seller that the stock price will go down, rather than up.

 

[dakh]

What would be a practical reason to borrow shares (at very high interest) and hold it long versus just outright purchasing from the open market from willing sellers at market or your stated limit price ?

Because borrowing doesn't move the stock on the open market I assume. If one wanted to accumulate and at volumes that would sway the vote, that would definitely create quite a run up if not done at the time of secondary offering.

 

[MitchJi]

On the short squeeze due to recall story.. I know some folks have all the numbers handy, how probable is the situation that the high short interest is precisely because shorts wanted to vote, and everyone at this point is simply in a holding position: shorts got everything they could from longs with margin accounts, and big hands are sitting on exactly the number of shares they think they need for the vote. This would mean no more recalls and no upward pressure.

I don't think that there's a clear reason for shorts to try to vote.

But beyond that I think that a significant number of the institutions will want to vote. To do that they need to call in their shares. Even a few institutions, e.g. Fidelity calling in their shares should have a big impact on the SP. The only way this doesn't happen IMO is if shorts start exiting now, which given the massive short interest will still force a nice bump in the SP.

One thing I don't understand about SolarCity options. If a massive short squeeze happens due to an unexpected forced recall, would long dated options be effected? The premium on options is usually based on the expected future price and implied volatility. Would long dated options see a huge spike if the stock saw a huge jump that would likely only be temporary?

Long dated opinion prices respond to ST changes in the SP. If they didn't you could buy LEAPS for less than shorter term options.

 

[MitchJi]

If your goal is to accumulate TSLA shares the best strategy might be to buy SCTY calls, with a ~December expiration, and exercise the options at or near the peak, then wait for your SCTY shares to be converted TSLA shares.

After a little more thinking I think that this is might not be the best strategy, if it causes you to not have enough dry powder to buy some puts at or near the peak.

 

[generalenthu]

I think we were saying slightly different things, I don't think I had a firm understanding of when the cashout would happen. I was assuming during the option conversion vs. you are saying at option exercise. Yours makes more sense, I think.

I traded some merger arbs via options before and realized the standard approach of using a basket, as OCC does, is the right way to do it without infringing on the rights of option owners.

The worst of these for option owners is when a stock gets taken out for cash at a good premium and the out of the money leaps holders lose all their time value. In this case, think of a SCTY Leap owner at 30 had TSLA made a cash offer for SCTY. These would be worth zero.