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How To Short Tesla Stock

How To Short Tesla Stock

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Publication Type: Single stock research
How To Short Tesla Stock

How To Short Tesla Stock | GraniteShares ETFs | GraniteShares 1X Short TSLA Daily ETF(TSLI)

 

The following article contains information about shorting Tesla stock using a new innovation in the ETF market, commonly referred to as an inverse or short single-stock ETF (TSLI).

Multiple stock market figures

Tesla (TSLA) has become one of the largest and most well known companies in the world. Perhaps more importantly, Tesla is the largest car maker in the world by market capitalization1. Their technological innovations in the automotive industry have made them the dominant force in the electric vehicle market.

Their cars are known for their fully electric capabilities, autopilot mode, zero emissions and of course, their famous serial entrepreneur CEO Elon Musk. Because of these factors and many others, Tesla is one of the most followed and traded stocks in the world. Tesla frequently appears in lists of the top 10 most traded stocks in the U.S., the largest stock market in the world.

Many investors will be familiar with stories of famous hedge fund managers such as Greenlight Capital’s David Einhorn who shorted Tesla stock in the past and indeed got into public spats with CEO Elon Musk over Twitter and other media outlets2. Fortunately, today, you don’t need to be a famous hedge fund manager to short Tesla stock. In this article, we’ll discuss how sophisticated investors can short Tesla stock or leverage Tesla stock in their own brokerage accounts using ETFs.

 

What is Shorting?

Shorting, or short selling, is a type of investment strategy that experienced traders repeatedly use. Investors borrow stock from their broker’s inventory with a promise to return the stock once the trade is over. In practice, they sell the borrowed stock and then buy it back once the price has reached a desired level. They then return the stock to the broker when the short selling has finished. A hypothetical example follows:

  1. A trader has a view that a given stock’s price will fall. In order to profit from this view, the trader decides to short the stock. The stock is trading at $50 a share
  2. The trader borrows 100 shares from his broker at the stock’s current price
  3. Trader then sells the shares in the market for $5000. The stock price falls to $25 a share. The trader buys back the 100 shares that were borrowed and makes a $2,500 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 and in order to secure the loan, traders have to post margin with the broker which can lead to margin calls i.e. the commitment of more capital to keep the loan in place if the price moves against the trade.

Put simply, if the share price of the stock you’ve shorted 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.

Bullish and Bearish 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: bullish and bearish. 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 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 March 2009 to Jan 20223 , a period of 13 years.

A bearish investor on the other hand 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 arguably in the Great Depression. In more modern times, it was in the early 2000s3 when the tech bubble burst.

 

How to Short Tesla Stock Using ETFs

With this brief overview of short selling stocks and market positions, it’s time to talk about how you’ll be able to short Tesla.

Short and Leveraged Single-Stock ETFs are a new addition to the U.S. markets. Very simply they are ETFs that seek to replicate the performance of common stocks (both long4 or short) using either leverage5 or not, in the case of some short or inverse ETFs.

Started in Europe, Short & Leveraged Single-Stock ETFs have become a popular investment tool for active traders and sophisticated investors. GraniteShares ETFs launched the first 3X long and short ETFs3 on single stocks in UK in 2019.

GraniteShares 1x Short TSLA Daily ETF (TSLI) is an ETF listed on the Nasdaq stock exchange. TSLI seeks daily investment results, before fees and expenses, of -1 times (-100%) the daily percentage change of the common stock of Tesla Inc, (NASDAQ: TSLA).

In a hypothetical scenario, if the share price of Tesla were to fall by -3% in a day, the stock price of TSLI would rise by +3% (excluding fees and other adjustments) on that day. In this regard, an sophisticated investor is able to express a bearish view on Tesla using TSLI, without having to use traditional brokerage techniques such as opening a margin account and borrowing stock. The Fund should not be expected to provide -1 times the cumulative return of TSLA for periods greater than one day.

 

What is Daily Rebalancing & Compounding

Daily rebalancing refers to the fact that the ETF rebalances its exposure at the end of each trading day. The reason is that the ETF seeks to replicate the daily performance of an underlying common stock multiplied by a leveraged factor. To achieve that objective the funds' “notional market exposure” is rebalanced at the end of each day to match the fund value.

The ETF aims to replicate the daily inverse returns of the underlying stock and the fund’s performance for periods greater than a trading day will be the result of each day’s returns compounded over the period, which is very likely to differ from underlying stock’s performance, before fees and expenses. This is commonly referred to as “compounding” or “the compounding effect”. Compounding affects all investments but has a more significant impact on funds that aim to replicate inverse daily returns. For a fund aiming to replicate the inverse performance of an underlying stock, if adverse daily performance of the underlying stock reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Underlying Stock increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.

The effect of compounding becomes pronounced as the underlying stock volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the fund is held and the volatility of the underlying stock during the shareholder’s holding period.

Multiple stock market figures

Practical Applications for Short or Inverse ETFs

In addition to expressing a directional view on a stock, short ETFs can be used as portfolio risk management tools in hedging strategies. In a hypothetical example, an investor who is long common stock of Tesla and has an unrealised capital gain, may not want to sell that stock or some of the stock if they suddenly become bearish on the companies short term prospects due to fundamental, macro or any other factors. Instead, the investor may want to hedge that position by purchasing a short ETF on Tesla such as GraniteShares 1x Short TSLA Daily ETF (TSLI). That way, in this hypothetical example, if the price of Tesla decreased over the holding period, the investor had the ability to profit from the fall without selling any of their long position.

Stock market monitoring

Trade Short & Leveraged Single-Stock ETFs with GraniteShares

GraniteShares provides a range of Short & Leveraged Single-Stock ETFs that enable investors to take conviction positions on common stocks. The current suite is as follows:

Fund Names

Fund Ticker

Underlying Stock

GraniteShares 1.25X Long TSLA Daily ETF

TSL

Tesla

GraniteShares 1X Short TSLA Daily ETF

TSLI

Tesla

GraniteShares 1.5X Long COIN Daily ETF

CONL

Coinbase

GraniteShares 1.75X Long AAPL Daily ETF

AAPB

Apple

 

There are a number of possible ways that an investor could use the ETFs ranging from short-term tactical applications through to strategic, longer-term implementation.

 

Volatility: active traders can capture and magnify intra-day moves.

Swing-trading: typically a short-term strategy, two to five days, where investors take positions in relation to an identified technical range.

Hedging: for investors who wish to hedge risk on a stock position, which they hold directly or through a third-party fund or index-tracking ETF.

Event driven: in a takeover situation, for example, an investor may go long the company being acquired and go short the acquirer.

Relative value: situations where an investor simultaneously runs a long and short position, which could be long a stock versus another stock or an index, or vice versa

Portfolio tilts: an investor may look to overweight or underweight individual stock exposure to take advantage of the fact that index returns can be driven by a small number of stocks.

Momentum: magnify returns when stocks are driven by momentum.

Short & Leveraged Single-Stock ETFs from Graniteshares can be bought in ordinary brokerage accounts just like any other stock or ETFs.

For more information, and to learn more about Short & Leveraged Single-Stock ETFs please visit. graniteshares.com

 

Important Risk Disclosure

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Funds, please call (844) 476 8747 or click here. Read the prospectus or summary prospectus carefully before investing.

PRINCIPAL FUND RISKS (see the Prospectus for more information)

You could lose money by investing in the ETFs. There can be no assurance that the investment objective of the Funds will be achieved. None of the Funds should be relied upon as a complete investment program. The investment program of the Fund is speculative, entails substantial risks and include asset classes and investment techniques not employed by more traditional mutual funds. Investments in the ETFs are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

GraniteShares Leveraged Long and Inverse Daily ETFs are not suitable for all investors. Investors who do not understand the Funds, or do not intend to actively manage their funds and monitor their investments, should not buy the Funds. The Funds are designed to be utilized only by traders and sophisticated investors who understand the potential consequences of seeking daily inverse and/or leveraged investment results, understand the risks associated with the use of leverage and/or short sales and are willing to monitor their portfolios frequently. For periods longer than a single day, the Funds will lose money if the underlying stock’s performance is flat, and it is possible that the Funds will lose money even if the underlying stock’s performance increases over a period longer than a single day. An investor could lose the full principal value of his/her investment within a single day. The Funds track the price of a single stock rather than an index, eliminating the benefits of diversification that most mutual funds and exchange-traded funds offer. Although the Funds will be listed and traded on an exchange, an investment in a Fund may not be suitable for every investor. The Funds pose risks that are unique and complex.

 

Investment Objective

The Fund seeks daily investment results, before fees and expenses, of -1 time (-100%) the daily percentage change of the common stock of Tesla Inc, (NASDAQ: TSLA).

Underlying Stock Risk: The Underlying Stock is subject to many risks that can negatively impact its revenue and viability including, but are not limited to price volatility risk, management risk, inflation risk, global economic risk, growth risk, supply and demand risk, operations risk, regulatory risk, environmental risk, terrorism risk and the risk of natural disasters. The Underlying Stock objectives may be affected by its ability to develop and launch new products, the growth of its sales and delivery capabilities, part supplier constraints or delays, consumer demand for electric vehicles and competition from existing and competitors. The Fund’s daily returns may be affected by many factors but will depend on the performance and volatility of the Underlying Stock.

Derivatives6 Risk: The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. These risks include (i) the risk that the counterparty to a derivative transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to: changing supply and demand relationships; government programs and policies; national and international political and economic events, changes in interest rates, inflation and deflation and changes in supply and demand relationships. Trading derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities.

For Long Funds: Leverage Risk: The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Underlying Stock will be magnified. This means that an investment in the Fund will be reduced by an amount equal to 1.25% for every 1% daily decline in the Underlying Stock, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net assets in the event the Underlying Stock declines more than 80%. Leverage will also have the effect of magnifying any differences in the Fund performance’s correlation with the Underlying Stock

For Short Funds: Short Sale Risk: The Fund will seek inverse or “short” exposure through financial instruments, which would cause the Fund to be exposed to certain risks associated with selling short. These risks include, under certain market conditions, an increase in the volatility and decrease in the liquidity of the instruments underlying the short position, which may lower the Fund’s return, result in a loss, have the effect of limiting the Fund’s ability to obtain inverse exposure through financial instruments, or require the Fund to seek inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. To the extent that, at any particular point in time, the instruments underlying the short position may be thinly traded or have a limited market, including due to regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. During such periods, the Fund’s ability to issue additional Creation Units may be adversely affected. Obtaining inverse exposure through these instruments may be considered an aggressive investment technique. Any income, dividends or payments by any assets underlying the Fund’s short positions, if any, would negatively impact the Fund. The Fund could theoretically lose an amount greater than its net assets in the event the Underlying Stock increases more than 100%.

For Long Funds: Compounding Risk: The Fund aims to replicate the leveraged daily returns of the Underlying Stock and the Fund’s performance for periods greater than a trading day will be the result of each day’s returns compounded over the period, which is very likely to differ from the Underlying Stock’s performance, before fees and expenses. Compounding affects all investments but has a more significant impact on funds that aims to replicate leverage daily returns. For a Fund aiming to replicate 1.25 times the daily performance of an Underlying Stock, if adverse daily performance of the Underlying Stock reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’sm investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Underlying Stock increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.

For Short Funds: Compounding Risk: The Fund aims to replicate the daily inverse returns of the Underlying Stock and the Fund’s performance for periods greater than a trading day will be the result of each day’s returns compounded over the period, which is very likely to differ from Underlying Stock’s performance, before fees and expenses. Compounding affects all investments but has a more significant impact on funds that aims to replicate inverse daily returns. For a Fund aiming to replicate the inverse performance of an Underlying Stock, if adverse daily performance of the Underlying Stock reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Underlying Stock increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.

 

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. There can be no guarantee that an active trading market for ETF shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions and frequent trading may incur brokerage costs that detract significantly from investment returns.

A liquid secondary market may not exist for the types of commodity-linked derivative instruments the Fund buys, which may make it difficult for the Fund to sell them at an acceptable price. The Fund is new with no operating history. As a result, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case it could ultimately liquidate.

Because the Funds may effect redemptions principally for cash, rather than in-kind distributions, an investment in Funds’ shares may be less tax efficient than investments in shares of conventional ETFs, and there may be a substantial difference in the after-tax rate of return between the Funds and conventional ETFs.

The Funds may engage in frequent trading of derivatives. Active and frequent trading may lead to the realization and distribution to shareholders of higher short-term capital gains, which would increase their tax liability. Frequent trading also increases transaction costs, such as commissions, which could detract from the Funds’performance.

The Funds are not a diversified investment, it may be more volatile than other investments.

This information is not an offer to sell or a solicitation of an offer to buy shares of any Funds to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

THE FUNDS AREDISTRIBUTED BY ALPS DISTRIBIUTORS, INC. GRANITESHRES IS NOT AFFILIATED WITH ALPS DISTRIBUTORS, INC

© 2022 GraniteShares Inc. All rights reserved. GraniteShares, GraniteShares ETFs, and the GraniteShares logo are registered and unregistered trademarks of GraniteShares Inc., in the United States and elsewhere. All other marks are the property of their respective owners.

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Definitions:

  1. CapitalizationIt is an accounting method that records the cost of an asset instead of the expenses. It is a process in which the cost of an asset is included the value of an asset and is expensed over the useful life of the asset. For example, the cost of office supplies is expected to be consumed in the near future hence they are charged to expenses at once in the profit and loss statement. An automobile is recorded as a fixed asset and the expenses are recorded over the time of the useful life of the asset via depreciation since the vehicle will be consumed for a long period of time as compared to office supplies.
  2. Outlets:Outlets are business premises, stores, or facilities for selling products, or services to consumers. An outlet can also be defined as the function of selling products and services to the ultimate buyer of those products.
  3. ETF: Exchange Traded Funds are exchange-listed consisting of a basket of securities that tracks underlying securities including stocks, bonds commodities, contracts, and currency. They are a popular form of passive investment.
  4. Long refers to a “Long Position” where the investor seeks to profit from a rise in a company stock price.
  5. Leverage refers to a “Leveraged Position” where investor seeks to magnify exposure to a rise or fall in a company stock price.
  6. Derivatives: The term derivative refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. A derivative is set between two or more parties that can trade on an exchange or over-the-counter (OTC).

 

 

 

Sources
  1. Reuters, Factbox: Tesla market cap eclipses that of top 5 rival carmakers combined.
  2. Business Insider, Billionaire investor David Einhorn reveals a new bet against Tesla, reviving his battle with Elon Musk
  3. Bloomberg, graniteshares.com
  4. London Stock Exchange, London-stock-exchange-welcomes-graniteshares-short-and-leveraged-single-stock-daily-etps

 

DISCLAIMER 

This website and its content have been provided by GraniteShares.

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (844) 476 8747 or click here. Read the prospectus or summary prospectus carefully before investing.

Index performance does not represent the ETF’s performance. It is not possible to invest directly in an index.

Indexes are unmanaged and index returns do not include investment fees and expenses.

FUND RISKS

The Fund is not suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage, under the Index rules and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if the Underlying Stock’s performance is flat, and it is possible that the Fund will lose money even if the Underlying Stock’s performance increases over a period longer than a single day. An investor could lose the full principal value of his/her investment within a single day.

Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the Underlying Stock over the same period. The Fund will lose money if the Underlying Stock’s performance is flat over time, and as a result of daily rebalancing, the Underlying Stock volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Underlying Stock's performance increases over a period longer than a single day.

An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Underlying Stock and the sector in which it operates. These and other risks can be found in the prospectus.

 

This information is not an offer to sell or a solicitation of an offer to buy shares of any Funds to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Please consult your tax advisor about the tax consequences of an investment in Fund shares, including the possible application of foreign, state, and local tax laws. You could lose money by investing in the ETFs. There can be no assurance that the investment objective of the Funds will be achieved. None of the Funds should be relied upon as a complete investment program. The investment program of the funds are speculative, entails substantial risks and include asset classes and investment techniques not employed by more traditional mutual funds. Investments in the ETFs are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

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