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Tesla short-sellers increase positions while longs get out after Musk is sued by the SEC, says S3 Partners

The bets by the shorts on Tesla stock are now paying off
Tesla signage
Tesla shorts are piling into the stock after Elon Musk was sued by the SEC for fraud

Short-sellers of Tesla Inc (NASDAQ:TSLA) stock are increasing their positions in anticipation of the shares dropping further, while bulls in the electric-car maker are scrambling to close out their holdings and lock in whatever profits they can get, an analyst for S3 Partners said Friday.

"Short-sellers are adding to their positions in anticipation of further prices weakness," accordning to a research note provided to Proactive Investors by Ihor Dusaniwsky, the managing director of predictive analytics at S3 Partners, which closely follows the short side of the market in stocks like Tesla.

"The contacts I’ve talked to are showing me several hundred-thousand shares of new short selling in Tesla this morning," he told Proactive in an email interview.

Tesla's stock dropped to the Friday session low of $268.10 and was trading 11.5% down at $272.15 by midsession. On Thursday, the stock closed at $307.52.

READ: Tesla hit by flurry of downgrades after Elon Musk sued by SEC for fraud

With Tesla's shares falling by that much, "some long shareholders (have begun) closing out their positions to lock in whatever long-term gains are left in their trades," said Dusaniwsky.

Tesla market shorts took it on the chin in early August when Musk tweeted that he had secured funding for his plan to take the company private.

The situation has now totally reversed.

"Short sellers took a $1.3 billion mark-to-market hit on August 7th, the day after The Tweet, but those that hung on to their positions or jumped into the deep end of the pool and shorted stock are now up $2.3 billi on in mark-to-market profits, making $3.6 billion in mark-to-market profits since August 8th," Dusaniwsky explained.

For Friday, he said "short sellers are up $1.27 billion in mark-to-market gains this morning."

READ: Tesla CEO Elon Musk sued by British cave rescue diver he called 'pedo guy' and 'child rapist'

The number of shares available for shorting and the fees involved provide a bonanza for Tesla shorts. Fees to borrow Tesla stock to short are seen 2.05% and general collateral stock borrows are quoted at 0.3% fee. Contrast that with fees for shorts in the Canadian cannabis company Tilray Inc (NASDAQ:TLRY), which hit 500% to 700% when the stock rallied to an all-time high of $300 this month.

"There are nearly 10 million shares available to borrow so there is plenty of room for more short sellers to get into the trade and stock borrow rates should not get much more expensive in the near term unless shares shorted increases by more than 3 million to 4 million shares," Dusaniwsky said.

"The conviction that longer-term Tesla short-sellers had in their thesis is finally paying off for them and may embolden those with excess capital and risk limits to increase their bets. We expect shares shorted to increase in the near term and if Tesla’s stock price continues to drop we could see shares shorted climb towards the 39 million to 41 million share levels we saw in May," he concluded.

Tesla is the world's biggest electric-car maker.

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