Understanding the Cost of a Short Position in Tesla: Insights and Market Dynamics

Short selling can be a complex and risky financial strategy, particularly when it comes to significant players such as Tesla. Understanding the cost of borrowing and maintaining a short position is crucial for any investor considering such a move.

The Cost of Borrowing Shares for a Short Position

In order to short a stock, you must borrow shares from a lender and sell them immediately. The lender will charge a short borrow rate for the use of their shares. This rate can vary widely depending on the stock, the broker, and market conditions.

For Tesla (TSLA), the current short borrow rate at Interactive Brokers is 0.25% annually. However, it is important to note that rates can fluctuate. In comparison, the cannabis stock TXRH (TLRY) had a borrow rate of 38% on some days, though it was as high as 500% last year.

Regulation and Margin Requirements

According to the Regulation T (Reg T) set by the Federal Reserve, the initial margin requirement for carrying a short position is 150% of the value of the borrowed shares.

Here's a breakdown of the margin requirements:

Initial Margin Requirement: 150% of the current market value of the shares you are shorting. Maintenance Margin Requirement: 125% of the current market value.

Brokers, however, may charge higher amounts and may have a minimum account size requirement. Additionally, the first 100% of the initial margin can be covered by the proceeds of the short sale, leaving only 50% in actual cash.

Let's take a practical example. If you borrow 100 shares of Tesla, trading at $500 each:

You will receive $50,000 from the short sale proceeds. You need $25,000 in cash or marginable securities to support the trade.

The borrow rate is applied to the price of the underlying shares, not the cash proceeds from the sale. For example, at Interactive Brokers, TSLA shorts cost $0.25 annually, plus the 50% initial margin.

The Fine Details

Interest earned on cash balances in your margin account can offset some of the costs. If your broker is paying interest on cash balances, you may receive interest income, which can reduce your overall cost of borrowing.

Furthermore, some brokers may not have shares available for lending at all in certain circumstances, making it impossible to short a particular stock.

It's crucial to understand that the cost of borrowing can have a significant impact on the profitability of your short position.

Insights Into Tesla's Shorting Landscape

The term "genuine short sellers" refers to those who are looking to profit from the short sale strategy. However, for Tesla, the concept of "genuine short sellers" is misleading. Most short sellers are funded by the oil and gas industry, which has a significant financial interest in undermining Tesla's success. These short sellers are not trying to make a legitimate profit but are engaged in a massive anti-Tesla campaign.

The shift from fossil fuels to clean energy represents a fundamental disruption that this industry can't afford to ignore. Therefore, shorting Tesla is more about a strategic bet against the entire transition to renewable energy rather than a simple hedge or investment opportunity.

Conclusion

Shorting a stock like Tesla involves understanding not only the financial aspects but also the market dynamics and the motivations behind the shorting behavior. The cost of borrowing and maintaining a short position, as well as the regulatory and market conditions, play crucial roles in determining the overall success of such a strategy. Skilled traders must be aware of these factors to make informed decisions.