Tesla (NASDAQ:TSLA) stock has climbed 37% since the US election. And I think the current share price reflects quite an optimistic outlook.
At today’s levels, the market seems to be looking past some substantial risks. But despite this, I’m not willing to bet against the stock – either outright or via the options market.
Optimism
A change of government in the US might make regulatory approval easier for Tesla’s robotaxi network. But as UBS analysts have been pointing out, things aren’t so straightforward. In order to roll out a robotaxi network at scale, it will need approval from state regulators. That’s a separate issue to federal approval and not one the President has direct control over.
On top of this, subsidies for electric vehicles (EVs) are looking set to disappear. While this might well strengthen Tesla’s competitive position, it’s likely to weigh on demand across the industry.
As a result, I’m not convinced the underlying business is keeping pace with the share price. But even if I’m right, betting against the stock could be a big mistake.
Selling short
There are two main ways I could try to short Tesla shares, but both are risky. One involves selling the stock today with a view to buying it back later. In that situation, if the share price goes down, I’ll make money. But if it goes the other way, even in the short term, I could have a real problem.
If the stock climbs, I’d have to either put up more cash with my broker or close the position at a loss. And theoretically, there’s no limit to the amount I could lose like this.
Even if I’m right about the stock being overpriced, that doesn’t mean it’s not going higher. And plenty of professional investors have been caught out like this with Tesla in the last few years.
Options
There is a way of betting against Tesla stock that doesn’t have this risk though. I could buy put options, which allow me to sell the stock at a specified price within a certain timeframe.
In this situation, I can’t lose more than the cash I put up to buy the options contracts. The worst outcome is the stock doesn’t fall, in which case the puts expire worthless.
Losing 100% of my stake wouldn’t be good, but this is arguably a possibility with investing in any business. With options however, the chance of this happening’s much higher.
With a put option, I need the stock to move within a specific time. If it doesn’t, I stand to lose my entire investment – even if the stock crashes the next day.
The problem with ‘going short’
With either strategy, the big problem with betting against Tesla stock’s the same. It’s that I don’t have a reason for thinking the share price is going down soon.
The fact it’s overpriced right now doesn’t mean a fall’s imminent. And that means trying to short the stock – directly or via options – is extremely risky.
Making short-term predictions about specific shares or the market as a whole is both difficult and dangerous. Since I don’t like that combination, I prefer long-term investing.
This post was originally published on Motley Fool
