Traders betting against Tesla are finally making millions

Elon Musk

Betting against Tesla this year has been an exercise in futility, as short sellers have repeatedly been burned by one of the market's hottest stocks.

Their patience is finally paying off.

Through Monday, investors had made $72 million over a two-week period as Tesla's stock plunged 11%, putting a dent in a massive year-to-date gain that totaled 80% at its peak, according to data compiled by the financial-analytics firm S3 Partners. Their mark-to-market profit is even bigger over the past month, totaling $160 million, according to the data.

And that short-seller windfall is likely to grow Tuesday, with Tesla's stock down as much as 3% after the company missed its production goal for the Model 3 sedan in September.

As a result of the recent share weakness, the amount of Tesla stock being held short has fallen by roughly $1.8 billion. The decline isn't surprising, considering many short sellers most likely jumped at the chance to close positions and pocket some profits after a long, arduous streak of losses.

Interestingly, the paring of bets against Tesla has come at a time when short interest is climbing throughout the rest of the automotive sector — and costing bearish speculators money. That increase has mirrored gains in the industry, which stemmed from strong August auto sales and speculation around a government-backed shift toward electric cars, according to S3.

In fact, the divergence in returns over the past month has made Tesla the sector's most profitable short over the period, as bets against other major auto manufacturers have lost $1.5 billion, according to S3 data. But that's not to say bearish Tesla wagers have been profitable on a year-to-date basis. Traders shorting the stock all year have still lost $4.1 billion, even after the recent turnaround.

But those Tesla skeptics refuse to be deterred. They're still holding a whopping $9.6 billion of Tesla stock short, showing that while bearish sentiment is waning slightly, it's not going away.

"Tesla shorts have proven that they have an iron will and are standing by their short thesis," Ihor Dusaniwsky, the managing director of predictive analytics at S3, wrote in a client note.

Another explanation is that investors are no longer shorting Tesla as a proxy for a hedge against declines in the broader stock market — a practice that was in full swing as of late July.

Now that US equities have proved that they can hit record highs without mega-cap tech stocks leading the way, it's possible that the trading playbook is being changed on the fly, with Tesla no longer bearing as much of the brunt of investor uncertainty.

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