Yesterday, I did it. After a lot of thinking, finally, I shorted Tesla. I know that is a common trade, many people are shorting it. Last time Tesla shorts were by about 26 percent of all the shares. (“Short interest.”) But I made a combined trade to hedge the risks, or, better, two promising trades, completing each other.
Two legs better than one
I shorted Tesla (by 308.4 USD) yesterday and I shorted the near VIX settlement (by 13.88 points) at almost the same time. (The VIX volatility index, volatility of the S&P 500 stock index.) What is the reason for this? Shorting VIX can be a gold mine if the frequent contango stays present. And if no huge spike in the VIX index happens, like those in February or something worst.
Chart courtesy of StockCharts.com
The contango works “in peaceful times” like an interest-producing factory, like some high yield bond. Last year, 2017 was a golden year for VIX shorters, some ETF-s and certificates almost doubled in value. But many other years before, also. This February, came the “VIX-Armageddon”, the spike, and some of them lost it’s value completely. But some, not.
ZIV ETF
In February, the VIX spike didn’t kill all VIX shorts, either. For example, the ZIV ETF stayed alive because this one is shorting the middle term VIX futures, not the most capricious nearest ones. The volatility and risk of the ZIV are lower than of other VIX shorting instruments. (Unfortunately, I can’t buy the ZIV, I had to use certificates in Frankfurt.) (Bottom line: damned Mifid 2.)
Chart courtesy of StockCharts.com
So, shorting VIX could be a gold mine, but if the stock market crashes, investors are in trouble. That’s because I was looking for some good short trades to compensate eventual losses on VIX, with gains on the stock shorts.
Why to short?
Why should we short Tesla? You can find dozens of opinions about this company every week, pro and contra. Only some of the arguments and only on the short side:
- It’s a cash burning machine.
- High debts, with high interests.
- “From production hell to logistics hell” (quote from Elon Musk)
- We don’t know if long-term gains will be possible.
- Erratic behavior of Elon Musk.
- Very strong competitors rich on capital (Daimler, Volkswagen, Audi etc.).
- Cooperating alliances of groups of competitors.
- Possibly jump in repair and guarantee costs.
And etcetera... I think if electric cars will offer a good business in the future, Tesla will have to deal with a lot of very strong competitors. And if no big money can be made in this industry, Tesla can’t make it either.
For now, I feel happy being a short seller. If this strategy will be really profitable, or not, we will see, but maybe only in some years. Both sides can be rewarding, with Tesla falling and quiet times on the Wall Street with continuously rewarding VIX shorts. And both sides can be disastrous, with a prospering Tesla and a market crash which wipes out all VIX short trades.
What do you think? Are this two combined trades better than only one of the two?
My other posts about VIX and contango:
Contango As A Gold Mine And Why Should Bitcoinists Care
Is Fat Passive Income From VIX Dead Forever?
Disclaimer:
I am not a financial advisor and this content in this article is not a financial or investment advice. It is for informative purposes only, or simply to make you think, entertain, increase testosterone and adrenaline level. Consult your advisers before making any decision.
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(Cover photo: Pixabay.com)
lol. Me thinks you've just wasted your money.
The way you talk, you're thinking it's just a car company and yet it is so much more.
It’s a cash burning machine. - Yeah, it's building cars and trucks that have never made it to full-scale production before
High debts, with high interests. - See above
“From production hell to logistics hell” (quote from Elon Musk) - There ramp has been steep, but this is a good thing.
We don’t know if long-term gains will be possible. - As the cost of batteries comes down, the profits will rise.
Erratic behavior of Elon Musk. - What and Steve Jobs never relaxed with some drugs :-)
Very strong competitors rich on capital (Daimler, Volkswagen, Audi etc.) - Which playbook are you reading? At best they are looking at 2020. The horse will have already bolted.
Cooperating alliances of groups of competitors. - Yeah because this company is a threat and has the largest charging network in the USA.
Possibly jump in repair and guarantee costs. - With a few thousand less pieces under the hood, it's unlikely a car owner will be worse off with a Tesla.
Yes, so are the optimistic points of view on Tesla. Audi and BMW are coming with new models in 2019. (Audi in Europe, end of 2018.) But 2020, that's only 15 months.
Thank you.
I think you are right i wouldn't short musk. But i would short snapchat, i see it going to 5 dollar per share over time.
Good luck. Short selling is the hardest part of the investing business. I agree TSLA is ridiculously priced but things can get more ridiculous before the other shoe drops. Hopefully you have a plan if the stock rises rapidly against you.
I do not bet against companies often especially during a raging bull market but when I do I choose to use put options to limit risk.
I use certificates (warrants) that are also limiting risks. And I use a limited leverage, actually 1,6x (K. O. by 497 USD).
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Competition is basically non-existent. Anyone who wants an electric car, wants a Tesla. The model 3 waiting list is unlike anything ever seen by any other auto manufacturer.
In addition to Tesla's brand prestige, loyal fan-base and unmatched products, no other car company has a giga factory to produce all the necessary batteries, nor do they have an extensive world-wide supercharger network. Tesla is so far ahead of the game here.
Keep in mind too that Elon Musk started Tesla for the sake of accelerating the world to sustainable energy, not for the sake of making money. Tesla is expected to be profitable soon in any case, but it's important to remember the philosophy it's built on.
Your money, your choice, but I see shorting Tesla as a terrible idea, and one that is acting against a company working tirelessly to change the world for the better.
Well, yeah, without Musk leading Tesla it will very likely lose a lot of its presence.
I believe this is the name of the game with this guy: invest on whatever (successful) project he has created, but think of it as a short time investment, then move on to the next one.
Mhh if everyone is looking for short positions I have to look for call options ;-)
I agree but Tesla isn't the most shorted share in US, far away from that. Some days ago it was on place 33 on the list of Nasdaq shorts of the Wall Street Journal, and 26 percent of all shares were shorted. Tesla's short interest - compared with Tesla only - is on a medium level, historically.
Thank you.
Enjoyed this and your other market articles
good arguments... Thx for that !
got short today, as well :)
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