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The Tesla Short Squeeze

Updated: Jan 27, 2021

Don’t get caught with your shorts down. That’s exactly what happened to Steve Eisman, (aka Steve Carell in the big short) who got greedy with his shorts, and went short again – this time not on the housing market, but on Tesla. He found out the hard way; you don’t mess with Musk. What made things especially bad for the shorties, was the ‘squeeze’.

And by that, I mean the SHORT SQUEEZE.

Short squeeze

What’s a Short Squeeze?

What causes a Squeeze is when you have too many people betting against a company.

They are “shorting” the stock, which means they ‘borrow’ shares (at today’s price) promising to pay them back in the future (when they think they can buy them cheaper).

You need someone to take the opposite side of that bet however, because whatever profits you make are losses for them and vice-versa. You can think of that counterparty as a person, or more generally as Mr. Market (hat tip Ben Graham).

What happened with TSLA?

Mr. Market represents ALL the other buyers/sellers out there, but you can think of him as one dude, a dude with a TON of TSLA stock (he’s Mr. Market, he’s got like all of it) so you say, ‘Hey Mr. Market, I’ll bet you that TSLA goes down’, and he says, ‘You’re on sucker’. You say ‘Bring it, TSLA is 700, it’s a bet’

The next day, TSLA goes to 800, and Mr. Market calls and is like ‘Yo, where’s my money!?’

You now owe him 100$ on that bet, and he wants you to pay up. You’re like, ‘Chill, I’ll get the money, I’m good for it’.

Now, maybe upfront there were some terms on the deal – like if you owe him money you’d pay a portion of it, or pay some interest on it. And so now that you owe him some money, it’s costly to keep this bet going on, and so maybe you want to cut your losses and close it out. He doesn’t care, because he’s Mr. Market, and he’ll take either side of the bet. Keep it on, take it off, who cares. He’s game.

Buyer and Seller model prediction

Comic by Stefan Gasic

But oh yea, by the way, your good friend Joe and your other friend Sara also had a short on with Mr. Market and they just closed out the position. Or in essence, they ‘bought’ the stock to settle the bet, since Mr Market sees the demand for the stock is up, he prices it higher to find more sellers.

Keeping It in Check

But if enough people who were long the stock want to stay long the stock, then the price needs to raise even more to get to supply/demand for stock in balance. So each raise of the price makes it more and more painful for those on the short side of the trade with Mr. Market. And then ‘covering’ or ‘tapping out’ of that bet, drives the price of the stock even further up, causing more people who had the bet, to have to tap out, increasing the stock demand and therefore price. SCIENCE! Hahaha..

Or at least that’s what one can say when they’re not swept up on the wrong side of it… which Eisman was, and breached his pain threshold so he tapped out, calling the stock ‘cult-like’ and ‘unmoored from valuations’ ::gasp!:: the humanity!::

Eisman got caught up with his Short, and ended up waaaay down.

As a side note to this story, he also mentioned the 3 words an analyst can slap on ANY model they want, and justify ANY price target: “Dynamic growth aspects”. Lol.

It’s the equivalent of putting Bruce Banner in a ring with Mike Tyson (in his prime) and saying, that Bruce kid looks like a winner because he has “dynamic growth aspects” – basically, a deus ex machina (or unpredictable and necessary miracle).

Here’s a link to another article describing this short squeeze and Eisman’s interview.

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