It’s really expensive to short Tesla’s stock

Watching the shorts.
Watching the shorts.
Image: Reuters/Joe Skipper
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Shorting a stock means investors—usually hedge funds—are betting on a company’s share price to fall. Tesla stock owners should know this well. According to Tesla founder Elon Musk, his electric-car company is “the most shorted stock in the history of the stock market” as funds bet the company will run out of money before it gets enough of its Model 3 cars to the masses.

Tesla’s shorts were one reason Musk cited to take Tesla private at $420 a share earlier this month. That tweet sent Tesla’s shares soaring, closing up 11% that day at $379.57 (paywall). That was very bad for short sellers, who borrow the shares betting on price declines and then hope to buy them back cheaper, pocketing the difference as their profit. A rise in the price can wipe out their position.

Today (Aug. 27), though, is a good day for the shorts as the share price has gone as low as around $310. Musk announced late on Aug. 24 that he would no longer try to take the company private. (N.B. Please note I own a very small amount of Tesla stock.)

How to short Tesla

You are charged for every day you bet against the stock. If you’re not David Einhorn, the hedgie billionaire to whom Musk has offered to send “short shorts” (paywall), Bloomberg has outlined the major expenses for the average investor to make a negative bet (paywall): the cost of borrowing the stock itself, and the cost of keeping a brokerage account funded while you’re shorting the stock.

The cost of borrowing a share (the stock-loan fee) is calculated daily and billed monthly. The fee for Tesla has been between 2.1% and 2.5% this year, Bloomberg notes, citing financial-analytics firm S3 Partners.

Any event that sends the share price up also sends the loan fee up, too. Which is why Musk’s potentially nebulous offer to take the company private enraged the shorts and forced an SEC investigation. ”If you were lent the stock at one borrow rate and other shorts pile in, a custodian might call the shares back and re-lend at a higher rate,” Bloomberg’s Elena Popina says. “You can pay more or close out, potentially at a loss.”

When a lot of people want to short a company, there is also an extra charge—a “negative rebate”—on the stock. S3 Partners estimated that was an extra 0.5% after Musk’s “going private” tweet.

In shorting a stock, you only make money when you close out your position and buy the shares back at a lower price—which requires paying the broker a commission. That means the decline in the shares must be enough to offset all of these running costs while you’re shorting, because you can’t touch that money.

The brokerage will typically want a sum of about half the amount of the shares in your margin account to keep your short alive. If you thought there was no chance that Tesla would go private and wanted to bet against 100 shares of Tesla at $379.57 after his tweet, that would be a deposit of almost $19,000. But you have to maintain the minimum level of the deposit. If the stock price goes against you and rises, you have to keep adding money to the account to cover your position.

Consider that Tesla stock has traded as low as $288 this year. Now you can imagine the misery that Tesla shorts faced over the summer. If you don’t have the cash at hand to keep your account topped up, don’t worry. The broker will lend it to you—for a fee of around 5%.

At its peak this month, a quarter of the shares of Tesla were being used to short the company, which means that more than $13 billion was bet against the company. This is not the biggest ever in stock-market history, as Musk claimed. But it is certainly seems to be the biggest negative bet against a large company (paywall) for such a sustained period of time.