TL;DR: A bit of DD for those wondering about what’s going on with TSLA’s recent sharp rise: a dramatic contraction of the “free float”, which could trigger episodes of delta-hedging and short covering fueled positive feedback loops, also known as an “Infinity Squeeze”.
The most amazing infinity squeeze in history was VW’s in 2008, when VW shares went from below €200 to over €1,000 within a single trading week, because there were more short positions than shares available (“free float contraction”):
Think about that, hedge funds shorted an automaker in fucking 2008, straight during the Lehman episode & meltdown, when demand for new cars cratered, i.e. this was the best possible cannot-go-tits-up Big Short leveraged trade a fellow autist can dream up during a financial crisis, and they were still forced out of their positions in a massive short squeeze…
Fast forward to 2020, during a raging bull market backstopped by Powell’s brrrrrrrr machine, with over a million Robinhood retail traders armed with
financial weapons of mass destruction leveraged options, and cue in Tesla’s potential S&P 500 addition, which would add TSLA with a bang at a nearly 1% weight: at today’s $1,650+ price over $100b worth of TSLA shares (over 63m shares) will be held by passive and active funds benchmarked to the S&P 500, in perhaps the most massive anti-dilutive share buyback program in history.
For those who want to watch this on video, here’s a high quality analysis of the S&P 500 inclusion from Tesla Daily:
Or another look at the float contraction caused by Tesla’s S&P 500 inclusion:
What neither the video nor the post detailed sufficiently are the non-dilutive & float contraction effects of options, the delta hedging inventory in particular, which is somewhere around ~40m TSLA shares today, or 27% of the float – and which goes up non-linearly as the TSLA price appreciates.
Today there’s a near record amount of TSLA options open interest: 800,000 call contracts and 1,200,000 put contracts, representing a huge delta hedging range of +80m and -120m TSLA shares – but with a current bias for upward skewed TSLA price moves. A +$200 move in TSLA generates about 5,500,000 shares worth of TSLA buying by market makers. (-4% float contraction)
And today a record value of TSLA shares are shorted (over $20b short interest VAR), with a short squeeze “ongoing” according to short squeeze experts S3 Partners, who called the early 2020 TSLA short squeeze:
If we add up the various TSLA shareholder categories who must or are strongly incentivized to hold TSLA, we get:
|Shareholders||float taken out of circulation|
|Passive index funds||26,000,000 shares|
|Active funds benchmarked to the S&P 500||37,000,000 shares|
|Delta-hedging at $1,500||~40,000,000 shares or more|
|Non-S&P-500 indices already holding TSLA||~20,000,000 shares|
|Shorts covering||up to ~5,000,000 shares (14m shares short today)|
|SUM||= ~128,000,000 shares|
|total free float||= ~147,000,000 shares|
Most of these entities will be forced to buy TSLA at any price and will take those shares out of circulation for a long time.
The next time the index funds will even consider selling some of their TSLA will be after the December reindexing, and because historically Tesla’s Q3 and Q4 are the strongest quarters, there’s a fair chance that the TSLA weight will further increase in December, triggering more accumulation.
Yeah, over 85% of the float will be locked up by long-term holders – or short covering which destroys virtual long shares anti-dilutively, which is recipe for a short squeeze + delta hedging positive feedback loop to drive an “Infinity Squeeze” to infinity and beyond. (In reality I think a trillion dollars valuation at $5,400 will probably be a limit to any spike.)
For the “it’s already priced in!” crew: it cannot be priced in due to a design flaw in the S&P 500 methodology (which flaw modern indices do not have), despite everyone knowing about S&P 500 inclusion, the “Index Effect” is real and substantial, because $4.6t of passive S&P 500 index funds cannot buy before inclusion, and because the Tesla event is so fucking huge & unprecedented.
For those who like to combine fundamental analysis with technical indicators and quant arguments, TSLA trading volume is already showing signs of ‘float contraction’:
- Yesterday 17.7m TSLA shares were traded, which is over 12% of the TSLA free float, in a single trading day.
- Last week over 105m TSLA shares were traded, which is over 70% of the TSLA free float, in a single trading week
- Last month over 300m TSLA shares were traded, which is over 200% of the TSLA free float
As a comparison: last week, when AAPL has hit new all-time highs, the turnover was just 4% of the float (!)…
A TSLA infinity squeeze will be slower than the VW squeeze IMO, but with a more permanent price increase, and during what appears to be a bull market so far.
Tomorrow Tesla will report Q2 earnings, which Wall Street expectations are an EPS loss and a GAAP loss.
If Tesla beats expectations and posts a profit, no matter how small, it will become eligible for the S&P 500.
Timeline of the addition: while the next S&P 500 index rebalancing occurs on September 18, there’s no such timetable to additions, which can be announced as quickly as 1 week after the company reports results – or as late as 7 weeks after the ER. This is one of the reason why many funds cannot buy TSLA in advance.
If Tesla is added then big index funds will get a couple of days advance notice from the S&P 500 committee – but for that Tesla has to post profits first, which is uncertain.
Disclaimer: this is not advice, I might be wrong & degenerate, trade on your own risk and gamble responsibly!
TL;DR: If this indeed happens (which it might not), then pretty much any TSLA call options post the S&P 500 announcement will go up in value.
Even super deep out of the money $3,000 calls expiring this Friday quadrupled in value yesterday already…
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.