So You Want to Short Tesla. Here's What You Pay to Pull It Off
(Bloomberg) -- Convinced Tesla Inc.’s best days are over and want to bet against it? You’ll pay for the privilege, though the price is coming down.
Burdens on short sellers are many, with risk the biggest -- a stock could soar and wipe you out. There’s also an assortment of outlays loosely tied to the popularity of the trade and its volatility. Traders love betting against Tesla, but the cost is not, at the moment, astronomical.
“The cost of borrow is high, which means that Tesla is special, but at the same time it’s not that special when you compare it with some companies whose shares are really hard to borrow,” said Ilya Feygin, senior strategist at WallachBeth Capital LLC. “Some of Tesla’s biggest shareholders are mutual funds that will willingly lend you the shares because it’s free money for them. It’s not that there are no shares available to short the stock.”
Where To Start
Shorting any stock, let alone Tesla, is for the brave. Professional investors know their way around, but for mom and pop the customs may be unfamiliar. Two big outlays exist: a rate on money used to keep your brokerage account stocked with cash if you don’t have the adequate capital, and the interest-like fee for borrowing the stock itself.
First, you need a margin account with at least $5,000 in it, often more. Say you want to short 100 shares of Tesla at $321.64 each, Wednesday’s closing price. Most brokers will require half of the total sum, or $16,082, on deposit. Don’t have the money? Your broker will lend it to you against the value of other stocks you own. Not at some rock-bottom rate like fed funds, but at 5 or 6 percent.
Stock Loan Fee
The stock loan fee, the most important levy you face, is where things get tricky. It’s calculated daily and billed monthly. With the so-called general collateral stocks -- liquid and easy-to-borrow shares like Apple and Amazon -- the outlay usually stays consistent. For one like Tesla, it’s much harder to predict -- a function of supply and demand. This year, demand to borrow Tesla’s has bounced around quite a bit.
Different brokers called for the story cited slightly different loan fees for Tesla, but it currently stands at roughly 2.1 percent. Note that the fee fluctuates with the price of the shares: 2.1 percent when Tesla is at $375 is more than when it’s at $320. Any market event that sends the shares higher results in a larger sum being yanked from your account.
The good news is that the borrow rate has been going down. This year’s average is about 2.5 percent, according to S3 Partners, financial technology and analytics firm. Tesla’s shares closed Friday at $322.82, up 0.9 percent.
“Rates have eased as supply has become more stable,” said Ihor Dusaniwsky, head of research at S3 Partners. “Rates tend to find a comfortable level where borrowers and lenders are happy paying/receiving a certain level and it takes a jolt to move off that level.”
A stock loan fee may differ from one broker to the next, and occasionally it pays to shop around for the best deal. On the other hand, when the demand to short goes up, it’s the lender who goes shopping. If you were lent the stock at one borrow rate and other shorts pile in, a custodian might call the shares back and re-lend at a higher rate. You can pay more or close out, potentially at a loss.
“If you’re a retail investor and you don’t have any leverage, you’re likely getting crashed,” said Larry Meyers, managing director at INTL FCStone Financial Inc. “It can be the Wild West.”
Institutions have their own set of costs and customs for negotiating the trades.
A short sale is at essence a loan, and when someone wants to short a security, he borrows it from a broker or custodian and gives cash or other assets as collateral. The collateral on the account ends up earning interest. Some is returned to the borrower, a sum known as the rebate. In some high-demand shorts, the lender pays no rebate, and demands even more money from the borrower -- a so-called “negative rebate.” Tesla is one of those.
Tesla’s rebate has been negative all year, though the burden on shorts has diminished. They had to pay an extra 0.5 percent after the going-private tweet and face a 0.12 percent outlay now, according to data by S3 Partners.
A more typical situation are stocks like Apple and Amazon, where the rebate amounts to 1.61 percent. On the other end of the spectrum is J.C. Penney, where bears are saddled with a negative rebate of 14 percent, or Innovative Biopharmaceuticals Inc., where they must pay an additional 98 percent.
“It it a little surprising to see such a mild negative rate with all the short interest in Tesla,” said Steve Sosnick, chief options strategist at Interactive Brokers LLC. “It is unusual to see a negative rate on big cap stocks. Negative rates are not all that unusual overall.”