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Before diving into how to short Tesla, let’s get some context as to why one might consider that:
Tesla (TSLA) by far the largest car maker in the world in terms of market capitalization (MC), accounting for over 1/3 of combined market cap of the 25 largest companies on that metric.
Yet, it only ranks 17th in terms of car sales in 2022.
This is one of many conundrums that has left many investors scratching their heads why have not they shorted the overvalued EV manufacturer in the first place? In 2022, the stock was down over 65%, and was the most profitable short trade in the U.S. market, earning $15.85 billion in paper profits for investors, according to S3 data.
What is short selling?
Short selling is a trading strategy that involves selling a security that the trader does not own, with the expectation that the price of the security will decrease, allowing the trader to buy it back at a lower price to close out the position and make a profit.
When a trader opens a short position, they borrow shares from a broker, and sell them on the market. This creates a liability for the trader, as they are obligated to return the shares to the broker at a later date, they also incur a lending fee for that service. If the price of the security decreases, the trader can buy back the shares at a lower price and return them to the broker, pocketing the difference as profit.
Additionally, there may be costs associated with borrowing the shares from the broker, such as interest charges or fees.
Short selling is often used by traders to speculate on a decline in a security’s price, hedge against potential losses in a long position, or to take advantage of overvalued securities.
A short squeeze occurs when a stock or other asset that has been heavily shorted experiences a rapid increase in its price, forcing short sellers to buy shares in order to cover their positions and limit their losses. This buying pressure further drives up the price of the asset, leading to a self-perpetuating cycle that can result in substantial losses for short sellers.
The graph below could be looked as a bubble that has popped and is now mean-reverting with this year’s price spike of over 80% YTD reminiscent of yet another short squeeze?
Now, that you know the mechanism, let’s dive into how it can be done.
There are a number of ways to short Tesla:
One of the most frequently used ways to borrow and short shares of Tesla is through a margin account with a broker, this is not easy, as the investor needs to put up a large sum of money into the brokers account usually over $30k. However, it also carries a high level of risk due to the extreme volatility of Tesla’s stock. Sudden upward movements in the stock’s value could result in significant losses for the borrower that could surpass his initial investment.
Buying puts or selling calls. Among these methods, buying puts is considered a relatively low-risk way to profit from a decline in Tesla’s stock price. This is because the most you can lose is the cost of the put options, and you can purchase long-dated puts that provide a longer timeframe for the stock to decline, giving you more time to profit.
Selling calls, on the other hand, involves greater risk. When selling call options, you are granting someone the right to buy a stock at a certain price, and as the seller, you must provide those shares. This strategy is typically recommended only for experienced investors who are comfortable with the higher risks involved.
Last, but not least, investors can use short Tesla ETPs to profit from declines in the underlying shares.
However, why should investors go for ETPs?
Benefits of Trading „Short & Leveraged ETPs“, over alternative methods
can be summarized:
Is there an ETF to short Tesla?
Leverage Shares offers several exchange-traded products (Short & Leveraged Single-Stock ETFs) that enable investors to take a short position on Tesla. These products can be traded like any other stock of ETF via a normal brokerage account.
The ETP tracks, excluding fees and other adjustments, seek to provide the daily performance of Tesla Inc shares.
Is this an Inverse ETF?
Indeed, the Short Tesla ETPs with symbols TSLS, TS2S, TS3S aim to provide investors with an inverse exposure to the daily performance of Tesla stock, by a factor of 1x, 2x, or 3x, depending on the specific ETP being used – similar to an inverse ETF, but focused on a single stock – by replicating the inverse daily return of Tesla’s stock.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
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Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
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He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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