(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA) 

Tesla Inc.'s (TSLA) latest quarterly results put a stake through the hearts of the shorts, who were hoping for a massive stock collapse. Short sellers have doubted Elon Musk and Tesla's ambitions since the start, doubting everything the visionary and the company set out to do.

What the naysayers got instead was a company whose second-quarter results easily surpassed revenue estimates and is on track to meet its delivery estimates. Moreover, Tesla is seeing accelerated reservations for its newest car, the Model 3, despite a slowing luxury auto market. The result is a stock that is surging by 7 percent, while the shorts are watching their profits from the last few weeks evaporate. (See also: Auto Stocks Face Treacherous Terrain as Sales Drop.)

Shorts Seller Run For The Exits

Short interest in the stock has been steadily falling since peaking in November 2016 and has declined by 21 percent, to 27.99 million, as of July 15. But don't be fooled: the shorted were getting out of the stock the whole time Tesla shares were rising. The Tesla shorts started running for cover in May, participating and helping to push shares to the highs seen by the end the of June, when it peaked at around $385. It will likely be the case that the shorts will be covering and participating should the stock continue higher, as it is doing today. 

TSLA Chart

TSLA data by YCharts

Option Market Prediction

But don't feel bad for them. They knew the game they were playing, and if they didn't, they were not paying attention to the signs around them. The option market was pricing in a massive move in Tesla share post-results. The stock closed at approximately $326 on August 2, and the $325 calls expiring on August 4 closed at $11 per contract, while the $325 puts were closed at nearly $11 as well.

The market was pricing in a trading range for the stock between $314 and $336, meaning the stock could swing by as much 3.5 percent in either direction. In fact, the number of total bets being placed for Tesla as measured by open interest was evenly distributed among the strike prices, so if a trader was short going into the event, they should have known the risks. 

( Interactive Brokers)


The problem for shorts at this point is that most of the big news events are now gone for them to recapture any momentum. The stock price has also held extremely well every time it has gotten to a range of $300 to $310, with the trading action of August 2 being a recent example. That's when the stock hit about $311, proceeding to turn and rally to close right around $326. The short seller may try to make their last stand at the $345 level, but if they can't pressure the stock lower, it is likely they will capitulate and finally throw in the towel. Tesla stock is already trading above the $345, with the next resistance level around $360. 

(Interactive Brokers)

The shorts have been making a bear case against Tesla for years, first doubting the Model S, then the Model X, then the GigaFactor, then Solar City, and finally, the Model 3. Now, it seems they have run out of things to doubt. And the reality is setting in, which is that all of Tesla's and Elon Musk's huge ambitions have come together like a grand master plan. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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