The Perils of Shorting: A Real Life Example

Hi Lads
Sorry for jumping in the middle of your conversation. I came across this thread while randomly googling "Trading stocks in Ireland".
This search led me to this particular thread from November 2019, when Tesla was trading in the 200 dollar range!
I couldn't help but laughing at the conversation (I'm down 20% on my short, but not worried about it!!!).
To preface; I've never traded stocks in/from Ireland. I don't know the first thing about doing it, beyond a brief search. I am interested in Tesla long term (yes, possibly crazy).
I have traded for many years while living in the States, especially bond Options and Putts on the CBOE. I was also buying Apple at 25 dollars a share, 4 or 5 splits ago.
Like most traders, I had some big wins and losses. Am now interested in trading again.....
Anyway; I can't entirely explain the price of Tesla. In many ways, it's long divorced from logic, as is most of the stock market!
I'm amazed at how little consideration is given on here, to the technologies Tesla is developing. They are fundamentally changing a number of industries.
20 years ago, I was developing night vision and thermal technologies. Then, we were limited by electronics, optics, manufacturing techniques and materials, but the battery was the most limiting factor. Teslas combination of batteries, AI, modern electronics, and motors, go far beyond cars. Each component has the possibility to change multiple industries, especially the electrical grid and energy storage.
It's obvious to see in the car market, he's years ahead of everyone else.
Not just in the technology itself, but in strategizing and sourcing for raw materials. The vision system problems, from self driving, led to an innovative robot vision, helping build the cars quicker.
Don't expect self driving cars any time soon. While they solved most of the major problems, the real hurdle is going to be governments/regulators and insurance companies. That said, Tesla is going to win on this front too. My guess is that Tesla eventually will incorporate lidar into it's system.
Anyway, enough of a rant!
My final point is, in a world with buckets of money!
In terms of good investments, there are a severe lack of choices.
In such a world, Tesla is a good investment!
 
Hey Dublin Blow Out - and welcome!

I'm not sure if Blow Out is the best moniker for someone intending to buy Tesla?!

Anyway, it looks like Morgan Stanley can also see potential for Tesla as per their commentary earlier today....relevant highlighted excerpts below

Morgan Stanley on Wednesday boosted its "bull case scenario" on Tesla to $2,500, implying a more than 65% surge from where shares currently trade.....

The bump in Morgan Stanley's Tesla price targets was driven by analysts increasing the forecast for units to 3 million by 2030, from 2.3 million previously. Morgan Stanley's bull case is possible if Tesla adds even more volume to its auto business, and over $100 billion in value to Tesla mobility, connected services, and battery supply.....

"It's becoming increasingly obvious that Tesla is going to become a very large company, approaching (if not exceeding) Toyota or VW revenues in the next decade and leaving the world's largest luxury OEMs behind," Jonas wrote. "For the first time in our 10 years of coverage we're starting to model this company as a very, very large auto maker."
 
Thanks, @Dublin Blow Out, for putting some flesh on the bull case for Tesla.
My main difficulty with your thesis is that, while Tesla may have once enjoyed a technical lead, you can never sit on your laurels in the tech business. Given your background, you know that as well as anyone. Tesla's focus has now shifted to delivering short-term profits. That might please some people (just read some of the posts on this thread celebrating their latest profit numbers) but most of us know that focusing on short-term profits damages the long-term health of a business.
To illustrate what REAL tech companies do to stay ahead, look at Apple. It is a mature tech player and is valued on a multiple of earnings much lower than Tesla's, so it should be spending a much lower percentage of revenues on R&D. The opposite is true. Its R&D spend is over 15 TIMES Tesla's. In fiscal Q2 2020 it spent 7.8% of revenues on R&D compared to just 4.6% for Tesla. R&D spend grew in both absolute terms (+15.6% versus Tesla's -14%, yes, Tesla's R&D spend was DOWN 14%) and as a percentage of revenues, from 5.5% to 6.0%, compared with Tesla's decline from 5.1% to 4.6%. Tesla's numbers are unforgivable for a company that aspires to be a top tech player. No wonder its much-vaunted self-driving ambitions haven't yet mastered stopping at stop signs and traffic lights.
 
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Dublin Blow Out said:
It's obvious to see in the car market, he's years ahead of everyone else.
Not just in the technology itself, but in strategizing and sourcing for raw materials.
Click to expand...
you mean the rare earth metals, has Musk got a "me too" deal with the Chinese to get access to the rare metals he needs out of places like the Congo. What about geopolitical risk and the looming trade wars, could Tesla be hobbled especially as technology is the area where the trade wars will be most intense, even if Trump does not win.
 
Guys - forget about your conspiracy theories

If people use bad language in posts they are deleted.

If you respond to posts with bad language in them, they will be deleted as well.

Brendan
 
Brendan. Noted! But @Dublin Blow Out 's post was v good. Could you send it back to him, get him to remove any bad (or perceived) bad language so that he can re-post it? Also send me back my reply so that I can re-post it.
 
Hi Sarenco

They do. There was a need to make an exception to accommodate Colm's great story about shorting.

There is no need to make an exception for bad language.

Brendan
 
@Sarenco has a point. The diary entry and the discussion serve as a warning of the dangers of shorting. It was reasonable for me to outline, at the start, my reasons for shorting the stock. In retrospect, I should have left it at that. There was plenty of opportunity for others to discuss the advantages and disadvantages of shorting without us entering into a detailed discussion of Tesla's pluses and minuses.
 
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Brendan Burgess said:
Guys - forget about your conspiracy theories

If people use bad language in posts they are deleted.

If you respond to posts with bad language in them, they will be deleted as well.

Brendan
Click to expand...
Tesla seems to ignite emotions like few other investments, similar to the property thread on this site before the crash everyone was dead set in their view points, it's almost like a belief system.
 
Brendan Burgess said:
Guys - forget about your conspiracy theories

If people use bad language in posts they are deleted.

If you respond to posts with bad language in them, they will be deleted as well.

Brendan
Click to expand...
Sorry Brendan
No offense.
I'll step out. Happy to read the thread, and what you guys are surmising.
 
A case of Dublin Bow Out?

That's a pity......it seems to me that here was an individual with many interesting things to say.
 
Hi,

Thanks all for a fascinating thread which has proved to be an excellent read.

@Colm Fagan and @Brendan Burgess, whilst I didn’t agree with your thesis for shorting Telsa I do admire your conviction on the trade and for having the courage to put a short position on. It is quite easy for those to sit on the side lines and poke holes whilst not having any real money in the game. It is unfortunate for you both that it ended in a negative outcome on your trades.

Whist the majority of the comments have been the pros/cons of the Telsa story I have a query on the mechanics of your trade which in effect ties into the title of ”the perils of shorting”.

Given your bearish view on Tesla, would you not have considered buying put options rather than shorting outright? Naturally the biggest limitation would have been on the expiry of this option and the date of which you would have needed to have been correct by but given your views at the time would a 6mth or 1yr expiry been within your comfort zone?
Put options do entail upfront premiums with a contract size of a 100 shares with I assume would be small in respect to Colm’s portfolio. As this would create a known cost upfront it would have eliminated gap risk on any non guaranteed S/L positions he would have had in place and also remove need for tied up capital due to margin requirements. If the trade was not working out as expected the option could be sold for its intrinsic value before expiry and some of the premium recouped. Without getting technical this could be managed via the time decay (theta aspect) via the greeks.

Not that the above would have worked in the Tesla example of this thread but at least the stress of liquidating positions to add to shorts in order to maintain the exposure could have been eliminated. I’m just curious to the approach on the trade which would dampen the perils of shorting.

Thanks
 
Hi RR

Good question.

I kept my exposure to Tesla at a level I could afford so I don't think a put option had any advantage for me.

When I shorted Bitcoin, I looked for a put option, but none was available.

Brendan
 
Hi @Risk Reversal
The quick answer is that I didn't really look at options. I have never used them to manage my portfolio. I would have to go back to stuff I learned in theory decades ago, but which I never put into practice. My main reason for not going near options is the point you mentioned about them having an expiry date. I believe that the Tesla share price will come back to earth, but I don't know when. It could be another year or more. (As @Sarenco pointed out, we should not debate why I believe it will fall and whether I'm right or wrong to hold that belief, just accept that I hold it). I don't want to be tied to a date by which the price will have come back to earth, which is what options would force me to do.

After the recent disaster, as recounted in these pages, I laid low on Tesla for a while, licking my wounds. I'm now back, but in a chastened and disciplined manner. I am using stop losses to limit my exposure. I funded the account in advance to be able to lose a certain amount, but no more. In other words, if I do nothing and the price keeps rising, I will be closed out automatically at a certain point, and still have some money in the account. (There is one caveat, which I will outline later).

I could do this in two ways. One was to put €X into the account and to set a stop loss price of $Y such that, if the share price increases to $Y, my entire position will be liquidated in one fell swoop, at a loss less than €X. In other words, I'm completely in the market until the price hits $Y, then I'm completely out. The problem with this approach is that the short position is at its most valuable when the price increases to Y, so I would be cashing out at the worst possible time.

I decided on a different approach. I inserted a carefully structured series of stop loss points (over 10 in total) at varying prices. A portion of my position is closed out at each stop loss point. Thus, if the price keeps increasing, I'm still in the market, but for a dwindling number of shares. My upper limit before I'm closed out completely is considerably higher than it would be under the first approach.

I could get caught out if the price jumps past a stop loss point, so that a portion of my short position is closed at a price higher than I had budgeted for. The decision to insert a number of stop loss points reduces this risk. While the price could jump past one stop loss price point, it's unlikely to jump past more than one on the same date.

There is also a dynamic element to my strategy which involves increasing my exposure when the price falls significantly (while remaining considerably above what I think is its 'fair' price - in my opinion, of course), but I haven't had much chance to put that dynamic element into practice - not yet anyway!
 

Colm,

You believe there is an inevitable day of reckoning for Tesla. If this is the case, shouldn't you be getting more aggressive with your shorting rather than less? The day of reckoning is surely getting closer!

This is like getting agitated while you wait for a bus to arrive. The more time passes, the more likely the bus is to show up in the next minute, so you should probably calm down rather than hailing a taxi.
 
NoRegretsCoyote said:
You believe there is an inevitable day of reckoning for Tesla. If this is the case, shouldn't you be getting more aggressive with your shorting rather than less?
Click to expand...

Hi Coyote

It's the paradox of shorting.

If you short something at $100, and it rises to $150, then it's an even better short if nothing has happened in the meantime to justify the increase.

But from a portfolio point of view, your losses are probably too great and you can't risk any more.

Brendan
 
NoRegretsCoyote said:
You believe there is an inevitable day of reckoning for Tesla. If this is the case, shouldn't you be getting more aggressive with your shorting rather than less?
Click to expand...
Brendan is right. A completely different strategy is required for shorting. That's the main message from this thread. I have adopted the strategy you suggest, with considerable success, for long position. It's a recipe for disaster when shorting.

Firstly, years of investing have taught me that I'm' not infallible. I could be wrong in my belief. If I am, when do I accept the error of my ways?

Secondly, even if I'm right, the price could go to $10,000 before it falls back. In proportionate terms it has already done more than this from when I first opened a short position in the share. It could do it again. If I didn't have a plan to reduce my exposure as the price increased, I could put my entire wealth - and more - at risk before the turnaround came. I cannot take that risk.
 
A PUT Option is in effect insurance. With huge volatility something like Tesla is likely to carry a very high insurance premium. That of itself is okay if you could be sure that the premium was "fair". In a direct Long/Short position there is complete transparency on the bid/offer spread. Unless the Option is being traded in a two way market there would be no transparency on the spread. My guess is that if there are writers of Options on Tesla they will have a whopping mark-up or spread.
 
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