Tesla Short Squeeze

Don't doubt Mr. Musk!

Lets go over the 02/04/2020 Market Data:

Short Interest in dollars: $14.28 Billion
Short Interest in shares: 24.58 Million
Total float in short: 18.37%

Lets breakdown what this means.. There is a total amount of $14.28 million dollars of shorts, and this is split across 24.58 million shares currently being short sold on the market. This all equates to 18.37% of the Tesla market cap being used in such a manner.

Tesla was the single most shorted stock listed on the Nasdaq. 

What goes down.. must come up? Tesla short sellers have lost an accumulative $5 Billion in two days, while someone else directly benefited.. That is right: Elon Musk. The legend himself had his networth climb $8 billion in the same time frame. Hefty pay day!

But what is a "squeeze"?

When you decide to take short position, you borrow shares from your broker, and sell them onto the market. If/when they are bought, you are in a short. This means, more or less, "to bet against".


However, you now have a debt to your broker. The value is the exact number of shares you borrowed. You have to return them eventually. If the price of the asset goes down, and you rebuy in, you keep the difference in value. If the price of the asset increases, you will have to buy in at a higher price than you paid - resulting in a loss.

Okay, so what happened at TSLA?

Like we mentioned earlier.. Tesla was the most shorted stock because over 18% of the total shares were in short position. This greatly reduces the circulating shares contributing to the liquidity of the market. Tesla started off strong, got the momentum rolling alongside the SPX, but then had a very optimistic earnings report. This sent the stock "to the moon" - but alas, that is a different company of Elon's. 

What happens next?

This is where the fun begins: lots of people holding onto bad shorts when the stock ramps into a bull market. This forces the short sellers to close their position. However, they must purchase a stock to do so. This compounds the buying pressure:

Market FOMO + short sellers buying = increase buying pressure

This is how, and why Tesla climbed so quick so fast. From a fundamental standpoint this isn't the most attractive company in the world. From the cultural perspective, it is massive. There are a lot of different factors which play into the price action of Tesla, and thanks for reading how this one was influenced.

 

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