The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
At last we have at least a partial explanation for why Tesla Inc’s stock gained 500% this year: Massive bets on high-flying technology shares by SoftBank Group Corp and others using equity derivatives. The extraordinary rise valued Elon Musk’s electric car business at $464 billion at the peak in late August, when only six US companies were worth more.
Unfortunately for Tesla’s devoted followers and the retail investors who’ve been giddily tallying up their winnings, the surge in the market value has very little to do with it selling more vehicles.
Rather, it’s partly a tale of plain old financial speculation. If that feverish sentiment cools suddenly, it could leave the stock vulnerable to another sell-off.
Tesla shares have tumbled 16% since the start of September, incinerating $75 billion of paper gains, and they fell about 15% in pre-market trading after the company wasn’t added to the S&P 500 index. The news that General Motors Co has taken a $2 billion equity stake in Tesla rival Nikola Corp won’t have helped.
Not everyone accepts the argument that SoftBank’s huge derivatives bets have by themselves powered the epic run-up in technology stocks, including Tesla, as the Financial Times reported last week.
But it’s certainly plausible that speculative purchases of call options — which give investors the right to buy a stock for specified price — by a much larger cohort of retail and other investors played a part in the rally.
When brokers sell short-dated call options they often need to hedge their exposure by buying the underlying stock. You can see how a cycle of rising prices might then become self-perpetuating. Call-option buying has been buoyant lately and volumes in Tesla stock trading have been astounding — almost $65 billion of its shares changed hands on just one day in mid-July, according to Bloomberg data.
Tesla’s recent five-for-one stock split seemed purpose-built to encourage more buying by making the nominal cost of the shares cheaper. The shares gained about 80% following the announcement in early August.
The stock’s gains were much larger than most large tech companies’ (see chart below), and they also defied simple explanation. Unlike Amazon.com Inc, say, Tesla hasn’t derived a material benefit from the pandemic. On the contrary, its California car plant had to shut for a while.
—Bloomberg