If a stock price begins to increase rapidly, it can turn it into buying demand in a short period of time, causing a short squeeze.
Tesla (NASDAQ: TSLA) stock reached its all-time high at $434.99 this week after rising by a staggering 31.8% in merely four weeks. And the company’s investors have all the shorters of the stock to thank.
According to financial data firm S3 Partners, Tesla is the most shorted car marker in the world by a large margin, with short interest surpassing $10 billion.
The second and third, which are Toyota Motor Corp and Daimler AG, have short interest of $1.5 billion and $1 billion, respectively.
In futures trading, short interest refers to the total amount of short contracts open on a particular stock or an asset.
In the case of Tesla, it means that there are $1 billion worth of short contracts in the market betting on the stock to decline in value within a certain time frame.
Ihor Dusaniwsky, S3 managing director, said that short interest for Tesla reached its record high in June 2018 at $13.7 billion.
While it is inaccurate to claim that shorts were the primary cause of Tesla stock’s extended rally since mid-2019, it certainly fueled the upside movement of the stock.
The three major driving factors for the recovery of Tesla since early this year are: significant success of the Shanghai Gigafactory, an optimistic outlook on Tesla’s Chinese market, and the firm’s dominance over the U.S. and European electric car market.
As Tesla started to demonstrate signs of maturation in regard to its cash flow, balance sheet, and sales, it shed more light on the company’s improving technology, well-received product launches, and international expansion.
The Cybertruck, for instance, which immediately gained a cult-like following after its highly talked about launch, shifted skeptics like CNBC’s Jim Cramer to turn bullish for the long-term trend of Tesla.
When Tesla stock started to turn around in June 2019 due to rising sales, short contract holders were likely pushed to close their positions or make margin calls.
Shorts can be considered as selling pressure on a stock. But, if the stock price begins to increase rapidly, it can turn it into buying demand in a short period of time, causing a short squeeze. S3 Partners said in a report,
Mounting mark-to-market losses have squeezed out many shorts with less conviction or tighter risk thresholds, but a significant amount of shorts have held their ground and taken their 2019 rollercoaster P\L ride in stride.
In the short-term, more shorts are expected to pile on top of Tesla stock as its price remains at its all-time high.
If the U.S. stock market maintains its momentum throughout the first half of 2020, which is expected due to relaxed financial conditions and high liquidity, it will position the car maker for a strong rally in 2020.
With government subsidies and tax cuts in China, Tesla is set to see an increase in sales in the Chinese market starting next year as production at the Shanghai Gigafactory begins.
Last modified: September 23, 2020 1:26 PM