Short Sellers’ Next Play on Tesla?

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Electric car maker Tesla Inc. (NASDAQ: TSLA) reported second-quarter results after markets closed on August 1. Shares closed that day at just over $298. On August 2, shares closed at just over $349.

On July 31, the closing date for the penultimate short-interest reporting period, nearly 35 million Tesla shares were short. The jump in the stock price following the earnings report was followed a few days later by a tweet from CEO Elon Musk that he had “funding secured” to take Tesla private at $420 a share. The stock hit a year-to-date high of nearly $380 on August 7.

On August 15, the end of the most recent reporting period, short interest in Tesla stock had dropped by about 2.3 million shares and the share price had fallen back to about $339. On August 17, Tesla shares closed at around $305.

How in the world is a short seller supposed to make a buck on a stock like this?

The answer appears to be that if you’re determined to be short Tesla, then get in, hold on and shut up. Did the shorts get cold-feet following Musk’s comments about taking the company private and bail out?

That’s impossible to know from the short interest report. But according to some reports, Tesla shorts were down $1.7 billion in mark-to-market losses on August 2, the day after the carmaker announced earnings. But the shorts were not covering, apparently choosing instead to hold on.

Then came Musk’s take-private tweet. Now there was a more or less fixed cap of $420 a share on how much a short seller could lose.

Tesla didn’t even come close to that price, and by August 15 shares were down about $40 a share from the peak. Over the next two trading sessions, the stock dropped another $40 to close on August 17 at virtually the same level as it had on August 1.

As of August 15, short interest in Tesla had dropped by 6.5% from 34.99 million shares on July 31 to 32.72 million shares, 25.7% of the company’s float.

Now that Musk and Tesla’s board of directors have wiped the take-private option off the board, there is unlikely to be any more speculation about short covering, at least for a while. The stock closed Friday at $322.82, up about 0.9% for the day, in a 52-week range of $244.59 to $389.61. The consensus 12-month price target on the stock is $327.45.