Convertible bond arbitrage strategies may hold half of the reported short positions in Tesla, as short bets against the electric carmaker remain resilient despite its market value roaring past USD150 billion this week.
Convertible bond arbitrage strategies may hold half of the reported short positions in Tesla, as short bets against the electric carmaker remain resilient despite its market value roaring past USD150 billion this week.
Tesla saw its share price rise 30 per cent immediately after posting surprise quarterly profit last October – and it has continued to spiral upwards since, reaching the new high this week and overtaking Volkswagen.
But new research by IHS Markit indicates that short positions in Elon Musk’s company are holding steady – despite the “relentless rally” that drove shares up to US780, or 136 per cent, since the start of December.
Market data shows that short positions in Tesla fell just 13 per cent from the start of December until mid-January, while its share price surged 57 per cent.
Sam Pierson, securities finance director at IHS Markit, said that while the recent market movements have brought “some pain” for directional short sellers, convertible arb funds have likely been piling into their short positions, helping offset the decline in traditional directional plays.
Between early December and February 3, the price of the Tesla 1.25 per cent 2021 convertible bond has risen 96 per cent, compared with the 136 per cent increase in the price of Tesla’s common equity.
Pierson’s analysis noted: “For a convertible arbitrageur, there is be a tendency to increase short positions in the common shares up to the point where the delta to the share price reaches 1, meaning that the change in price for the convertible bond equals the change in price for the equity. That appears to be happening now. On February 3, the common share price increased by 19.9 per cent, while the 1.25 per cent 2021 convertible increased in by price by 17 per cent.”
This analysis would suggest convertible arbitrage players have steadily piled up their short positions over the last three months, only now completing the process of hedging the embedded options in this final push in share price, Pierson observed.
“That may also mean that directional shorts have reduced their exposure by a much larger amount than suggested by looking at the total short interest.”
