Why Tesla Margin Requirement Changes Could Be A Buying Opportunity

Why Tesla Margin Requirement Changes Could Be A Buying Opportunity

Given shares of Tesla Inc TSLA have doubled since CEO Elon Musk tweeted that "Tesla stock price is too high imo" a little more than two months ago, many Tesla traders are understandably torn about how to approach the stock at its current level above.

Unfortunately, a number of market dynamics unrelated to Tesla's underlying business performance are muddying the waters as well.

On Friday morning, Benzinga founder and CEO Jason Raznick joined Benzinga’s PreMarket Prep trading show and discussed how brokers are changing margin requirements, and it could trigger Tesla selling pressure in the near term.

Raising Margin Requirements

Margin requirement is a percentage of a stock that a trader must pay for in cash rather than credit.

Raznick said he received a message from E*TRADE Financial Corp ETFC on Thursday notifying him that margin requirements for Tesla shares have risen from 55% to 70%.

“E*TRADE gives you the option to sell some stuff off or it does it automatically,” Raznick said.

Within minutes of receiving that notification, Raznick said he observed a dip in Tesla’s share price.

“A lot of people that got this message yesterday had to sell shares,” he said. “Multiple people I talked to overnight were forced to liquidate Tesla shares. Multiple people. And these are people who were positive, up on Tesla, and they had to sell by the close yesterday."

Raznick said brokerages are attempting to free up shares of Tesla to sell to institutional investors.

“This is happening because large institutions are buying shares of Tesla, and brokerage firms want to free up shares to sell these large institutions,” he said.

Tesla's stock traded higher by 8.4% at time of publication on Friday to $1,512 per share.

See Also: Tesla Demonstrates Why Short Selling Is So Much More Dangerous Than Going Long

Forced Selling

On Thursday, E*TRADE and Fidelity all reportedly increased margin maintenance on Tesla to 70%.

A spokesperson from Charles Schwab Corporation SCHW told Benzinga in an email the brokerage hasn't "moved our margin requirements on TSLA in quite some time...our requirement has been higher than most firms – we’re at 75% now."

"There are people selling this stock right now not because they want to, not because they have bad fundamentals; they are being forced to. Including myself and including some others, we are forced to sell stock because of the margin we have on it, and I do believe that represents a potential long-term trading opportunity," Raznick said.

Raznick said he bought October $1,500 Tesla call options a week and a half ago and is looking to buy more Tesla call options on Friday.

Watch to the full discussion with Jason in the clip below


PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google PlaySoundcloudStitcher and Tunein.

Posted In: electric vehiclesJason RaznickPreMarket PrepLong IdeasTop StoriesExclusivesTrading IdeasInterview