When do shorts have to cover? (Neroden's megathread)

[Reciprocity]

These calculations assume no other buyers other than the shorts covering.

But I’d invest $420 (and more) in a private Tesla. Since Goldman is not going to ask me to join the buyer group, I’ll have to buy in the public market (which I will do when the deal seems like a lock).

A private Tesla is a very attractive investment (see, e.g. SpaceX). There could be a lot of buyers competing with the shorts covering between the time the deal looks firm and the deal is effectuated.

When do shorts have to cover? (Neroden's megathread)

The thread was originally about when shorts would need to cover.. not who else would be buyers. I think it's good to talk about that because it is definitely as important. Simply what's the supply and what's the demand. Who must sell, who wants to sell and when is critical as well. Who must buy, who wants to buy and when is also critical. Is it even possible to happen in an orderly way? Also not really talked about is the fact that net buying of any kind will lift the price. If not a squeeze, it could still be considerable. The question is what happens when the price goes above 420. It's a ridiculously low price when you consider it's only 8% higher then a year ago and Tesla has doubled production twice since then and profits just around the corner. The stock is highly derisked every day.

Does 430 cause institutions that must sell to sell in lue of 420 after the deal closes. Do institutions cry foul and say they won't vote for a buyout unless it's higher? Does this alone cause a run in the shares to get in and to cover. And WTF happens to the calls/puts. Someone must smarter then I must help figure it out.

 

[Reciprocity]

This is a standard pre-deal phenomenon. The long holders who don't trust management are getting out while the people who want to be in to go private are getting in. Merger arb players could also be getting in, but right now I don't think they are, based on what I've read about the most common merger arb strategies.

But we don't really know how many people want in on the go-private deal who aren't going to be part of the buyer group, so we still don't know how many shares have to be bought out. A *minimum* would be the shares held by index funds, but that's less than the number of shares fabricated by short-sellers.

Index funds can't sell in the open market, they must wait until the deal is done and the stock is delisted.

Again I'm assuming shorts must cover on the open market before the deal is closed. How are they forced to cover?

 

[Reciprocity]

From wikipedia

Counterparty risk
A further, often ignored, risk in derivatives such as options is counterparty risk. In an option contract this risk is that the seller won't sell or buy the underlying asset as agreed. The risk can be minimized by using a financially strong intermediary able to make good on the trade, but in a major panic or crash the number of defaults can overwhelm even the strongest intermediaries.

Edit: my thinking in this relates to what Porsche did to force a squeeze. They bought tons of calls, enough to amount to 31% of the companies total number of shares. This pushed the outstanding shares to 125% of the float (amount not already owned by Porsche, and the state). What if the Saudis are buying calls today in large amounts. They could then exercise these at anytime forcing the seller to acquire the shares and then the Saudis can sell if those shares to shorts that must cover. They can then use those proceeds to buy shares in the private deal.