close
close

The “Tesla financial complex” is coming back to life

Unlock Editor's Digest for free

Investors who bet against Tesla have had a tough few days, writes Bloomberg:

Hedge funds that were short Tesla between Election Day and Friday's close suffered a loss of at least $5.2 billion on paper, according to Bloomberg calculations based on data from S3 Partners.

[ . . . ]

Since the election on November 5th Tesla Shares have gained nearly 30%, adding well over $200 billion in additional market value. As of Friday, the company was valued at over $1 trillion. Against this backdrop, hedge funds that had previously built short bets have now reversed course.

Since Elon Musk tied his fortune to Donald Trump months ago, the hedgies' bold strategy did not pay off. In the days since the Republican victory, rampant buying of Tesla call options has triggered a classic “gamma squeeze,” according to analysts, with brokers on the other side of the trade forced to buy even more of the underlying stocks, to cover their positions.

The numbers are “huge,” says Rocky Fishman of Asym500. According to Fishman's figures, the notional trading value of Tesla options has averaged $145 billion per day since the election. Last Friday, the fictitious trading volume reached an incredible $245 billion.

That compares with $55 billion per day for Nvidia, the second-most active individual stock market, and $310 billion per day for the rest of the U.S. individual stock market combined.

Fishman points out that he doesn't have a breakdown of which of the $310 billion is represented in the S&P 500 and which is not. “There are significant non-constitutive factors in the total,” he told us on Monday, “including Bitcoin-related stocks (Coinbase, MicroStrategy), ADRs (Taiwan Semiconductor, Alibaba, MercadoLibre) and election-related stocks (Trump Media).” “

But no matter how you look at it, the “Tesla financial complex” that Robin reported on in 2021 appears to have returned. And with a bang.

Elsewhere in options land, the S&P 500's implied volatility and put skew were “completely decimated” following Trump's election victory.

That's what Nomura's Charlie McElligott says, describing in a note published today how investors burdened with burdensome risk management constraints were forced to hedge against a scenario (delayed and disputed election results) that never came to pass. As a result, their downside puts “turned into a smoldering pile of ash.”

McElligott notes that index call option skew (the difference in implied volatility between out-of-the-money call options and at-the-money call options) is now “screaming in a big way.” , as investors chase a Trump-fueled rally that last week boosted the S&P 500 to its best week of the year. The cross-asset volatility risk premium we wrote about last week has disappeared:

[High-res version]

According to Deutsche Bank, funds that are adjusting their equity exposure to prevailing market turmoil have increased their positions to their highest level in over a month. Discretionary investor positioning has climbed close to the top of its historical range.

Aside from the market's tendency to think it's coming back, basically everything is great and the only way is up, up, up!

You may also like...