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How To Short Tesla Stock

How To Short Tesla Stock

Posted:
Topic: Technology
How To Short Tesla Stock

Tesla has become one of the most well known companies in the world. Their technological innovations in the automotive industry have made them a force to be reckoned with for the foreseeable future.

Their cars are known for their autopilot mode and how beneficial they are to the environment because they produce zero emissions. Because of these factors and many others, people worldwide buy Tesla stocks waiting for the next big eruption on the market.

Today we’ll talk about how to short Tesla stock for those keen on investing and the stock market regarding Tesla’s share prices. We’ll discuss what shorting stock is, different ways to go about it, and shorting Tesla stock.

What is Shorting Stock?

Shorting stock, or short selling, is a type of investment strategy that many experienced traders repeatedly use. Investors borrow stock from their broker’s inventory and promise to return them once short selling has finished. It usually works as follows:

  1. You speculate that a stock’s price will decline in the future and borrow a certain amount of shares from your broker at the stock’s current price
  2. Once the stock price falls, you buy back the shares that were borrowed and make a profit off of the difference

Although it may appear to be a simple concept, there’s a reason why only experienced traders use this tactic. Short selling a stock comes with considerable risk. There’s no guarantee that the stock’s price will fall.

If the share price happens to go up, then you’ll have to buy back the shares you borrowed from your broker at a higher price. This means that you will lose money. This is one of the reasons to take extra caution when you decide to short Tesla stock.

Bearish and Bullish Investors

Before we continue to talk about how to short Tesla stock, it’s imperative to learn about two terms that you’ll often hear in the investment world: bearish and bullish. These two terms describe how a potential investor views the stock market.

A bullish investor believes the stock market as a whole or a specific security will increase in price. They’re foreseeing long-term general gains in the market. This works in conjunction with a bull market in which stocks are frequently on the rise over some time. For example, the longest bull market in U.S. history lasted from December 1987 to March 2000.

A bearish investor believes that the whole market or a specific stock will fall in price. An investor views the market in this position because they see a decline in share prices by 20% over time.  The longest bear market in American history was from March 1937 to April 1942.

Knowing these two investment positions on the market will aid you when you decide to short Tesla stock. It always helps to have a bit more information when starting a new venture.

How to Safely Short Tesla Stock

With this brief overview of short selling stocks and market positions, it’s time to talk about how you’ll safely be able to short Tesla stock. There are two ways to do so:

  • Credit Call Spread
  • Covered Call

Using these two methods, you’ll have a better chance of limiting your risk. Make sure that you research the market well before you start this process. The goal is always to gain money instead of losing it.

Dice spelling out essential investment terms

Credit Call Spread

A credit call spread is a bearish trade strategy where the investor buys several call options at a specific price and sells the same number of options at a lower price before they expire later that month. If you want to reach maximum profit, the stock price would need to close under the lower striking call that you’ll sell at its expiration date.

Here’s a basic formula to calculate the maximum profit that you can receive:

  • Net Premium Received - Commissions Paid To Broker = Max Profit

Depending on the broker you borrow from, you will have to pay a small commission fee when buying the stock. However, if you’re an active trader, commissions can eat away at your profit, so it’s best to look for lower commissions options. To better understand using a credit call spread, we’ll use an example about Tesla stock.

Let’s say that Tesla stock is trading at $25 in May. An investor that’s bearish on Tesla enters a call spread of JUN 80 call for $200 and sells JUN 75 call $500. Doing this will give you a net credit of $300 for entering this trade.

If the stock price drops to $22 at the expiration date, both options ( JUN 80 call and JUN 75 call) will expire worthless, and you’ll get to keep the $300 as profit. You’ve now successfully earned a profit on your Tesla stock.

There are also more aggressive bear call spread strategies to widen the difference between the two options’ strike price. However, the cost of the stock needs to go down significantly to maximize profit.

Bull Call Spread

Although credit call spreads are a well known bearish strategy, bullish investors use call spreads to produce long-term future gains. A bull call spread typically comprises a long call option with a lower strike price and a short call option with a higher strike price. Both calls have the same underlying expiration date and stock.

Bull call spreads establish net cost, and as the underlying stock rises in price, profit is made. Profit can be limited if the stock price of the short calls strike price rises, and you could limit losses if the cost of the stock goes below the strike price of the long call.

To calculate maximum profit, you can use this formula:

  • Strike Price of Short Call - Strike Price of Long Call - Net Premium Paid - Commissions Paid = Max Profit

So in the example above, the difference in the strike prices for the Tesla stock would be 5 (JUN 80 - JUN 75). The net premium paid would be the difference between the cost of the share that was bought and sold. Finally, the commission is what you would pay your brokerage firm.

With both a bear call spread and a bull call spread, you’ll be able to see what the market offers while minimizing your risk and maxing out your earnings. It will depend on the strategy that you want to utilize.

Stock market monitoring

Covered Call

The next strategy that can be used to short Tesla stock safely is a covered call. A covered call is a popular strategy in which an investor has a long position on an asset and sells their call options on that asset to make a profit.

Using the covered call strategy is seen as neutral because it is neither bearish or bullish. It’s mostly used when an investor believes that the stock price will only slightly increase or decrease during the length of the call option.

Use this formula to calculate maximum profit using a covered call:

  • (Strike Price - Stock Entry Price) + Option Premium Received = Maximum Profit

Let’s say that you buy Tesla stock for $20 and get a $0.26 option premium by selling a $25 strike price call. You decide to keep your position, presuming that the Tesla price stays under $25 until the expiration date. If the price goes up to $30, you’ll only make up to $25, which means your maximum profit will be $25 (strike price) - $20 (stock price) + $0.26 = $5.26 per call.

Like most trading strategies, covered calls come with the risk of making and losing money. However, they are a popular strategy because they are relatively low risk.

Trade Your Stocks at GraniteShares

Now that you understand the safest ways to short Tesla stock, it’s time to choose a company that provides innovative investment solutions. At GraniteShares, we provide affordable consultations about ETP strategies to help you maximize your gains while minimizing your losses.

Notable ETP strategies that we use include:

  • Short Selling
  • Dollar-Cost Averaging
  • Asset Allocation
  • Swing Trading
  • Sector Rotation
  • Hedging
  • Learning to bet on seasonal trends

With these strategies, regardless if you’re an expert trader or just beginning, we could help you find the investment portfolio with a wide variety of assets. Trading with GraniteShares is the best step you can take towards gaining financial freedom.

Contact us today for more information about investment options and how you can start generating additional income today.


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 DISCLAIMER

This is a disclaimer stating that all trading and investing comes with risks. Always do your research and do not invest more than you can afford to spend.

GraniteShares accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this blog or the contents. GraniteShares Limited (“GraniteShares”) (FRN: 798443) is an appointed representative of Duff & Phelps Securities Ltd. (FRN: 466588) which is authorised and regulated by the Financial Conduct Authority.

This blog does not constitute an offer to buy or sell or a solicitation of an offer to buy securities in any company. Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. No recommendation is made positive or otherwise, regarding individual securities or investments mentioned herein. Any summary list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in a particular investment. Prospective clients must consult with their own legal, tax and financial advisers before deciding to invest. This email contains the opinions of the author and such opinions are subject to change without notice. The source of data is GraniteShares unless otherwise stated. No guarantee is made to the accuracy of the information provided which has been obtained from sources believed to be reliable. This email and the information contained herein is intended only for the use of persons (or entities they represent) to whom it has been provided. Past performance is not a reliable indicator of future results.  The value of an investment may go down as well as up and can result in losses, up to and including a total loss of the amount initially invested. Investments may involve numerous risks including, among others, company risks, general market risks, credit risks, foreign exchange risks, interest rate risks, geopolitical risks and liquidity risks.  Please note that GraniteShares short and leveraged Exchange Traded Products are for sophisticated investors.

 

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