Tesla (TSLA) is facing an unprecedented $20 billion short bet against its stock. Could it potentially turn into a bloodbath?

For years now, Tesla has been a popular target of short sellers, who are people who bet against stocks and benefit if they go down.

With the automaker’s stock having a meteoric rise over the last few months, CEO Elon Musk has been taunting those people betting against the company.

Now we get actual data on the short interest on Tesla’s stock, thanks to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Dusaniwsky says that Tesla short interest is about to reach $20 billion for the first time:

Tesla continues to be the largest equity short in the domestic market with $19.2 billion of short interest. TSLA recently hit a short interest level of $19.95 billion and is poised to be the first stock to hot the $20 billion short interest threshold.

To be fair, the unprecedented value of the short position is not due to increase interest in shorting Tesla, but because the value per share has also skyrocketed — closing at $1,394 TSLA per share.

Dusaniwsky argues that Tesla benefited from a short squeeze:

The reason behind Tesla’s short squeeze is obvious and straight forward, large mark-to-market losses are forcing out some short sellers as they hit their loss limit thresholds.

In order to “short” a stock, short sellers need to borrow shares at the current price, and they hope that can buy back at a lower value to “cover” their position.

If the stock price increases and many short sellers decide to cover at the same time, it creates higher demand for the stock and can push it higher, which is called a “short squeeze.”

The analyst believes that Tesla shorts have lost just over $18 billion on their bet against Tesla so far in 2020.

Almost half of those losses happened in June and the first week of July.

However, Dusaniwsky says that the squeeze was relatively small, with shorts buying only 1.70 million shares worth $2.32 billion to cover their positions:

Short sellers have bought-to-cover 1.70 million shares, worth $2.32 billion, over the last month as Tesla’s stock price rose +44%. Over the last week, we saw a lull in short covering with only 98,000 shares covered which is still worth a significant $133 million. If Tesla’s stock price continues to trend upward, we expect even more short covering as mark-to-market losses accumulate. Traders can expect a squeeze on their shoulder from their controllers to trim or close out their positions as their Tesla losses breach risk limits.

Therefore, he argues that Tesla’s stock (TSLA) might experience another short squeeze if the stock keeps climbing.

Electrek’s Take

Tesla is currently valued at $250 billion. It’s hard to imagine that it could go on another run triggering another short squeeze.

However, it looks like Tesla might be on the verge to get some good news.

It is reporting earnings in less than two weeks, and everything is pointing to a small profit, which could in turn enable Tesla to enter the S&P500.

Historically, stocks who enter the S&P500 get a boost as funds tracking the index buy into it.

Unless this is already priced into the stock, this could result in another price increase for Tesla and a possible bloodbath of a short squeeze.

What do you think? Let us know in the comment section below.

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