Tesla is one of the best-known global companies for a variety of reasons.
Their widespread and continuous innovations with automated, electric-powered cars could mean that Tesla holds a monopoly on the future.
When traders invest in the company, they picture a Tesla car for every household, Tesla trucks making freight, Tesla cabs roaming the street. When a trader invests in Tesla, they make an investment in the future – but the future is not yet written.
Another reason that Tesla is a well-known company is thanks to its CEO, enigmatic billionaire Elon Musk.
Musk’s personality and notoriety has both helped and hindered the progress of his company depending on who you ask; but what is objectively clear is that his actions directly lend Tesla’s value an air of instability.
Even Musk’s posts on Twitter have been known to cause massive dips in Tesla stock value.
In one Tweet, Musk himself admitted that he believed fellow tech Billionaire Bill Gates himself was holding a short-selling position on Tesla stock, to the amount of half a billion dollars.
When an investor shorts a stock, they do so because they have a strong belief that the value of that stock will imminently fall.
With the bombshell that even one of the world’s richest men is willing to stake so much on a decline in Tesla’s value, voices have begun to murmur. Just how does one approach shorting Tesla stock?
What Is Shorting Stock?
‘Shorting’, ‘short-selling’ or ‘going short’ is a method of making profit from a stock when you believe that the value will fall, and that nobody else will want it.
- To short a stock, you first have to borrow shares of that stock from your stockbroker.
- You then sell the borrowed shares immediately, bearing in mind that you will have to buy them back so that you can return them to your broker.
- If your assumption about the value of the stock dropping was correct, you then purchase them back for a lower cost (when you believe that the value is low enough) and return them to your broker. You have now just turned a profit.
- The reason that shorting is usually only ever undertaken by serious traders is that should your risk not pan out, and the stock value actually rises dramatically, you will have to purchase them back at a loss so that you can return them to your broker- and the margins could be infinitely high. Many have gone bankrupt from an incorrectly shorted stock.
Bearish And Bullish Investors
There are two terms which describe how investors view the stock market in the long-term.
A bullish investor has the belief that the stock market on the whole, or one security in particular, will increase in price, and foresee long-term gains.
They are predicting what is known as a ‘bull market’, where the entire market trends upwards- sometimes even for decades at a time.
A bearish investor has the opposite belief, that the stock market will trend downwards, or a security will trend downwards. Bear markets (see also ‘What Is A Death Cross In Stocks?‘) have also been known to last for many years.
Considering these two positions will help you when you look at shorting Tesla stock.
How To Safely Short Tesla Stock
There are two ways in which you may safely short Tesla stock:
- Credit Call Spread
- Covered Call
Utilizing these methods and thoroughly researching the market you can limit your risks – and make you some money.
You should also consider researching a Cover Call Spread, which we can’t go over in depth in this article.
Credit Call Spread
This is a bearish trader strategy in which an investor purchases several call options at one price (see also ‘What Is Gamma In Options?‘), and then sells the same number of options at a lesser price before they expire- which would later that same month.
To achieve the best profit, the stock price must close under the lower price call.
There’s a simple sum you can do to figure out the maximum profit that you could get:
Net Premium Received – Commissions Paid To Broker = Max Profit
This all comes down to the broker which you choose to borrow from and their own commission fees on purchasing a stick.
If you are a particularly active trader then you need to keep an eye on things – commission can quickly strip away large chunks of your profits. Shopping around for the lowest commission options should help you out here.
More aggressive bear call spreads will create a bigger difference in the strike prices of the two options which you have called, although this does require for a more significant dip in the value of the stock chosen in order to achieve the biggest possible profit.
Bull Call Spread
Credit call spreads may be the bread and butter of the bearish way, but they can still be used under a bullish philosophy, investors tactically using calls to create some terrific long-term gains.
These are formed of a long call option with a lesser strike price, and of a short call option with a higher one, both culminating at the same date and of the same stock.
These spreads create an overall net cost, and as the stock rises so do your profits. If the price of the stock of your short call has risen, then you may find that your profits are limited.
If the price of the stock falls below the strike price of the long call, then you can minimize your losses.
In order to work out your maximum profits, simply apply this sum:
Strike Price of Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid = Max Profit
Using spreads of both a bear call and a bull call, you could minimize your risk and max out your earnings, depending on just what specific strategy you decide upon using once you have completed your research of the market and of your stock.