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Tesla Short Sellers Paying Much Higher Interest To Bet Against Company

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Tesla Short Sellers Paying Much Higher Interest To Bet Against Company

Tesla Motors Inc (NASDAQ: TSLA) shares have had quite a week. While the issue is up 13.25 percent over the past five trading days, Tuesday afternoon and Wednesday saw some significant action following a tweet by Andrew Left of Citron.

Left's Tuesday tweet supported shorting Tesla for multiple reasons, including high expectations coupled with demand issues.

Subsequently, according to a Reuters article out Wednesday, the tides for Tesla short sellers may not be as favorable as once thought as interest rates to short Tesla have seen a spike based on activity and supply and demand pressure.

‘Pressure Builds'

Noel Randewich, Reuters, reported that despite the stock surge of roughly 25 percent since earnings reports in February, "activity by short sellers – who bet that a company's shares will fall – has hit an all-time high, and the interest rate paid by short sellers has skyrocketed."

Related Link: Tesla's Apparent Oil Correlation Doesn't Make Stock A Buy: Why Citron Is Short

Short interest in the stock currently sits at 26.5 percent of outstanding shares, and gained this week on back of the Citron tweet.

The Issue With Interest

As explained by S3 Partners Head of Research Ihor Dusaniwsky, "With only about 1 million Tesla shares remaining on hand to lend out, the annualized interest rate paid by short sellers to borrow the shares has climbed to as much as 20 percent from around 3 percent two weeks ago," Reuters said.

Dusaniwsky was quoted as having stated, "We definitely had demand-based pressure on rates and now, because there's almost no stock left, you have supply-based pressure."

In other words, because short sellers "borrow" shares for the purpose of selling them, re-buying them at a lower price and ultimately returning the shares to their owners, short sellers pay interest to the shares' true owners. If the shares available to be shorted decrease in availability, their interest rates increase accordingly.

 

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