15 votes

Tesla shorts lose more than $1 billion on post-earnings surge

26 comments

  1. [26]
    Neverland
    (edited )
    Link
    I slightly understand some of the reasons for short sales as a financial instrument. However, I hate the idea of betting directly against companies instead of investing in their competition. I...

    "Today's $1.1 billion mark-to-market loss has turned a profitable year for short sellers, they were up $276 million in year-to-date mark-to-market profits prior to today's rally, into a loss," Dusaniwsky said in an emailed statement. He added that shorts are now down $831 million in year-to-date mark-to-market losses.

    I slightly understand some of the reasons for short sales as a financial instrument. However, I hate the idea of betting directly against companies instead of investing in their competition. I admittedly do like Tesla, but I am just happy to see the short sellers take a big haircut from anyone. To me, short sales are a perversion of free markets. What do you all think about the practice of short selling?

    Edit: grammar and phrasing

    7 votes
    1. [5]
      Matthias
      Link Parent
      There's absolutely nothing wrong with shorting stock. Isn't any sale of company stock an example of betting directly against a company? Shorting is an important check on the market to safeguard...

      There's absolutely nothing wrong with shorting stock. Isn't any sale of company stock an example of betting directly against a company? Shorting is an important check on the market to safeguard against overvaluation.

      10 votes
      1. [4]
        super_james
        Link Parent
        As long as it's not naked shorting...

        As long as it's not naked shorting...

        1 vote
        1. [2]
          rake_tm
          Link Parent
          That is already illegal though.

          That is already illegal though.

          1 vote
          1. Neverland
            Link Parent
            But the regulation system for knowing if shorts are naked or not is based on self reporting, correct? Is the grayness allowed by self reporting the reason why their are rumors of naked shorting on...

            But the regulation system for knowing if shorts are naked or not is based on self reporting, correct?

            Is the grayness allowed by self reporting the reason why their are rumors of naked shorting on TSLA?

            1 vote
        2. RapidEyeMovement
          Link Parent
          isn't there a rumor out there that is what happened to $TSLA in the first place?

          isn't there a rumor out there that is what happened to $TSLA in the first place?

          1 vote
    2. [2]
      RapidEyeMovement
      Link Parent
      Short selling increases liquidity in the market because short have to buy the stock back at some point in the future when otherwise they would not be in the market. It incentivizes the opposing...

      Short selling increases liquidity in the market because short have to buy the stock back at some point in the future when otherwise they would not be in the market. It incentivizes the opposing view point and decreases the pump and dump scams.

      If I as an investor can only benefit from the growth of a company than that creates perverse incentives for the market as a whole.

      If you cannot play both sides of the market then you can only make money in one direction.

      4 votes
      1. Neverland
        Link Parent
        Very good point.

        If you cannot play both sides of the market then you can only make money in one direction.

        Very good point.

        1 vote
    3. [10]
      BlackLedger
      (edited )
      Link Parent
      I'm for it (though, full disclosure, in my professional life I primarily deal with futures markets). To begin with, in industry parlance, "short" is virtually synonymous with "sell". If you think...

      I'm for it (though, full disclosure, in my professional life I primarily deal with futures markets).

      To begin with, in industry parlance, "short" is virtually synonymous with "sell". If you think about this conceptually, if I already own stock in company ABC and I don't think the share value is going to improve, I'm certainly within my rights to sell it. If that weren't the case, the market wouldn't operate at all, since no one would be able to sell. If this were the case, prices could only ever stay flat or be bid up. Effectively, the only difference between this sort of regular sale and a colloquial "short" is that the "short" is borrowing to establish the position. However, it seems unlikely that people would have a problem with someone borrowing money to establish a long position (buying a stock) - that's just good business, right? If so, then why is there an issue with short selling, since we've already established that someone needs to sell for these purchases to take place. As such, we can think of the shorts as providing liquidity.

      You can also look at short selling as a form of pressure relief. Consider assets like housing or bitcoin, where it is difficult or impossible to establish a short position. Not coincidentally, these are areas that are prone to bubbles, since prices can only ever be flat or moving upward. In the absence of shorts, the market acts a bit like a car without brakes.

      3 votes
      1. [4]
        Neverland
        (edited )
        Link Parent
        Thanks for your thorough response. The example of bitcoin (the lack of pressure on it) really brought it home for me. I am starting to see why shorts are not necessarily a negative thing. One...

        Thanks for your thorough response. The example of bitcoin (the lack of pressure on it) really brought it home for me. I am starting to see why shorts are not necessarily a negative thing.

        One question though, why is the short market only held to “self regulation” on reporting? Doesn’t this create unnecessary gray areas that could allow naked shorting?

        1 vote
        1. [3]
          BlackLedger
          Link Parent
          That's a much deeper question, but yes, it does create a gray area. I could probably write a book with my opinions on regulation (and I am of two minds: in my career I have worked for a large...

          That's a much deeper question, but yes, it does create a gray area. I could probably write a book with my opinions on regulation (and I am of two minds: in my career I have worked for a large pension fund, which absolutely should be tightly regulated; I've also worked for the family office a billionaire, who is a sophisticated enough investor that he can operate without as many checks in place). The very short summary is that options give market operators a wide latitude in constructing synthetic means of achieving the same result due to what is called put-call parity.

          Put call parity means that the value of a call minus the value of a put is equal to price of a forward minus the strike price, times some discount factor. This could be expressed as C - P = D(F - K), where C is the call, P is the Put, D is that discount factor, F is the forward and K is the strike. This can be used to create something called a "synthetic short" by purchasing an at-the-money put and selling an at-the-money call. If you're not familiar with the terms, a call is the right but not the obligation to buy a security at a given (strike) price, a put is a right but not the obligation to sell it. I bring this up as an example more to show that market participants could get around strict regulation, and so creating an environment where they are encouraged to self-regulate and other participants are then keeping an eye on them (as they have a financial incentive to do so) can, in theory, work better. That said, self-regulation is heavily influenced by the business culture and so can become a joke when the culture does not take it seriously or creates perverse incentives.

          1 vote
          1. [2]
            Neverland
            Link Parent
            Thanks again. I need to do a lot of reading to process all that.

            Thanks again. I need to do a lot of reading to process all that.

            1 vote
            1. BlackLedger
              Link Parent
              No worries, I'm happy to help!

              No worries, I'm happy to help!

              1 vote
      2. [5]
        RapidEyeMovement
        (edited )
        Link Parent
        I've got to ask, since you are in the Fiance sector, do you think the naked short theory about the initial rise $TLSA stock price is true?

        I've got to ask, since you are in the Fiance sector, do you think the naked short theory about the initial rise $TLSA stock price is true?

        1. [4]
          BlackLedger
          Link Parent
          I'm not an equity expert (though I was recently discussing a different sort of short strategy structured around the maturity of their convertible bonds next year) so while I can't say for absolute...

          I'm not an equity expert (though I was recently discussing a different sort of short strategy structured around the maturity of their convertible bonds next year) so while I can't say for absolute certain, I will say I would not be surprised if there were some naked shorts, or synthetic equivalents, out there. That said, most people would not make a short play like that around an earnings call so I doubt they're a significant factor. For instance, I would be highly skeptical that say, Goldman Sachs (who are strong sell proponents) would have a position like that. Would I wager that no hedge fund anywhere in the world does? No. The potential upside on naked shorts or equivalents is too tempting to absolutely rule it out.

          2 votes
          1. RapidEyeMovement
            (edited )
            Link Parent
            I do not vouch for this guy, or the story, I only think that it is an entertaining read. It goes over the initial rise of $TSLA stock https://twitter.com/silkdynastystx/status/880523203457671168

            I do not vouch for this guy, or the story, I only think that it is an entertaining read.

            It goes over the initial rise of $TSLA stock
            https://twitter.com/silkdynastystx/status/880523203457671168

          2. [2]
            RapidEyeMovement
            Link Parent
            So it would appear Musk is trying to find away to force the conversion of his convertible bonds coming dues at the end of the year.

            So it would appear Musk is trying to find away to force the conversion of his convertible bonds coming dues at the end of the year.

            1. BlackLedger
              Link Parent
              Looks like it. I just checked the share price and they are in the money right now.

              Looks like it. I just checked the share price and they are in the money right now.

    4. edenist
      Link Parent
      To me shorting certainly does seem to be a rather perverse practice, so far as a first-order look at what is going on. That said, just because I listen to freakonomics doesn't mean I've anywhere...

      To me shorting certainly does seem to be a rather perverse practice, so far as a first-order look at what is going on.
      That said, just because I listen to freakonomics doesn't mean I've anywhere near enough knowledge to actually comment on the effects of the practice on the economy.
      Though there was that one time where a company I worked for floated, and the position I was in gave me all-to-clear knowledge about just how much duct-tape was holding the operations together [as well as the ability to remove said duct-tape]. Some ethical dilemmas* were pondered that day, I must say.....

      *For the record [sup, IRS/SEC], no stock [or shorted positions] was obtained, and I left said duct-tape where I found it ;-)

      2 votes
    5. [7]
      nic
      Link Parent
      You can not effectively short bitcoin...

      You can not effectively short bitcoin...

      1 vote
      1. [6]
        RapidEyeMovement
        Link Parent
        Well now you can w/ the Futures market. But you are correct that part of the build up in BTC was a combination of HODL mentality and in effective shorting possibility.

        Well now you can w/ the Futures market. But you are correct that part of the build up in BTC was a combination of HODL mentality and in effective shorting possibility.

        1 vote
        1. [3]
          BlackLedger
          Link Parent
          Even that's very limited, as the margin rate is set incredibly high ($200,000/contract, for reference, something like a US 5 year treasury note future has a maintenance margin requirement of...

          Even that's very limited, as the margin rate is set incredibly high ($200,000/contract, for reference, something like a US 5 year treasury note future has a maintenance margin requirement of $680/contract ).

          2 votes
          1. [2]
            RapidEyeMovement
            Link Parent
            WTF, so it was really only created for the big boys

            WTF, so it was really only created for the big boys

            1. BlackLedger
              Link Parent
              I wouldn't even say the big boys, it is more the...mid-boys maybe? Most of the prime brokerages (the ones that larger firms would deal with) won't even touch BTC contracts, long or short. The...

              I wouldn't even say the big boys, it is more the...mid-boys maybe? Most of the prime brokerages (the ones that larger firms would deal with) won't even touch BTC contracts, long or short. The people actually accepting orders are outfits like Interactive Brokers (who are accessible to people with six-figure amounts; I realize that's non-trivial to most people but in an environment where firms could easily be in the hundreds of millions or billions, it's accessible. Upper-middle-class people could potentially have their own IB account).

              2 votes
        2. [2]
          nic
          Link Parent
          Cash settled futures really don't have the same effect on the underlying. I can short volatility in the futures market, but it will have a negligible effect on implied volatility.

          Cash settled futures really don't have the same effect on the underlying.

          I can short volatility in the futures market, but it will have a negligible effect on implied volatility.

          1 vote
          1. RapidEyeMovement
            Link Parent
            That appears correct, I didn't realize it was cash settled futures contract or the difference really. Just recently trying to increase my understanding of this area. I really think the BTC futures...

            That appears correct, I didn't realize it was cash settled futures contract or the difference really. Just recently trying to increase my understanding of this area.

            I really think the BTC futures market was created so the big boys could come in and short it if you look at the margin requirements on the contract. And looks like they did it in away so that they would never have to hold(HODL) the asset.