The Mechanisms That Fueled TSLA's Meteoric Q1'20 Rise

Introduction

If you're here to read about the current on-going macro-economic crisis, you're in the wrong place. If you're here to read about a prediction for TSLA's Q1'20 deliveries, you're in the right place, although that's not what this blog is about. My guess is ~110k produced and ~90k delivered, but especially deliveries is very hard to estimate with so many unknown variables in light of the on-going crisis.

Anyway, what I want to focus on in this blog is what the hell happened to TSLA during the first half of this quarter, because I've compiled some very interesting data that will allow us to put some pieces together.

We'll start with some fundamental theory, then go through a lot of relevant data, some compiled by me and some compiled by others, and finally we'll go through how it all facilitated TSLA's meteoric rise.

Here's an overview of what to expect:

1. Stock Price Fundamentals
2. The Make-up of TSLA Holders
3. TSLA Holders Research
4. Delta Hedging
5. The Story of TSLA's Meteoric Rise

1. Stock Price Fundamentals

Most people probably understand stock price fundamentals already, but it's worth briefly going over this topic and how it relates to TSLA, because of how important it is to properly understand the rest of this post.

In essence, a SP is based on simple supply and demand. In practice there is a finite number of shares, and at different stock prices there will be different levels of demand for the shares. If the market price for TSLA were $10 for example, there wouldn't be nearly enough TSLA shares in circulation to fulfill all the demand, and therefore the market price would increase. If on the other hand TSLA was trading at $100,000, supply would far outpace demand, and therefore SP would drop.

Using this framework for thinking about a stock's market price, it's clear that there are only two fundamental things that influence SP:

1. Supply. Supply can both increase and decrease. An example of a shares supply decrease is a share buyback. In theory, this should lead to a SP increase, because there are now less shares available, but probably still the same number of people that are willing to hold the stock at the same valuation. An example of a shares supply increase is a public offering. All else being equal, this should in theory lower the SP, because there are now more shares available for the same number of people who want to hold the stock at the same valuation. Another factor, which influences the supply of shares, and which is particularly relevant to TSLA, is SI (short interest). When a short seller borrows someone's share and then sells it in the market to a new person, this creates an extra 'synthetic share'. Thus, the real number of shares available to investors is the shares outstanding plus the shares sold short.
2. Demand. The number of factors that influence the demand for a stock is far too high to make an exhaustive list, but a few examples are: news, developments, sentiment, macro-economics, etc.

2. The Make-up of TSLA Holders

Every stock has a couple of groups of holders/investors, such as retails, index funds, insiders, etc. In the case of TSLA, I think that a few of these groups are quite unique in terms of their size and price (in)elasticity.

Insiders (or should I say Elon Musk?)

Maybe it's unfair to say it's just Elon, because Larry Ellison also owns a good chunk of TSLA shares, and there are of course other minor TSLA insiders, but it is quite a unique aspect of TSLA that approximately 25% of all shares are in the hands of insiders, and that the vast majority of these belong to the CEO. Elon has mentioned numerous times that he will be "first in, last out", and he has almost never sold any shares. In fact, he's bought more whenever he's had the opportunity. Even if TSLA goes to $10,000 overnight, Elon will not sell.

Price Elasticity: Effectively zero.

Institutions

There are a number of TSLA institutional holders aka large professional investment firms. As is the case with most other stocks, most of TSLA's shares are held by institutions. Institutional holders is the group of holders that is the most varied, because there are many different types of institutional investors. Some institutions are short term speculators (IPG Investment Advisors LLC), some are focused on quantitative analysis (Renaissance Technologies LLC), some are market makers (Susquehanna), and some are long term investors (Baillie Gifford, Capital World Investors). Therefore, it's impossible to look at this group and say it will act in a certain way, because different parts of this group have very different objectives, and thus will act very differently. However, Tesla has a lot of institutional investors that, while they might not be quite as price insensitive as Elon is, are hardcore supporters of Tesla, understand the long term vision, and are not going to sell out of their positions any time soon.

Price Elasticity: Ranges from very low to quite high. I'd say moderate overall.

Mutual Funds

Mutual funds lie in between institutions and index funds. Individuals can invest in mutual funds, just like they can in index funds, but, unlike index funds, mutual funds are actively managed. Mutual fund portfolio managers can buy and sell stocks as they see fit. Therefore, how a mutual fund treats TSLA as an investment depends on both the mutual fund, and on who is currently managing the fund. Mutual funds tend to act more like long term investors than short term traders, so most of them are unlikely to sell barring major price movements.

Price Elasticity: Fairly low.

Index Funds

Because TSLA is not in the S&P 500 index yet, we can keep this section brief. TSLA is currently only in the Nasdaq and Nasdaq 100 (QQQ) indices. The index fund with the second largest number of TSLA shares is the FNCMX (Fidelity Nasdaq Composite Index Fund), which holds 73,489 shares as of Q4'19. This is nothing in the grand scheme of things, and so the only index fund of significance currently holding TSLA is the Invesco QQQ Trust with 1,782,180 shares as of Q4'19.

There's actually one more type of 'index fund' that doesn't just track an index, but pretty much tracks the entire stock market. An example of this is the Vanguard Total Stock Market Index Fund tracking the entire US equity market. There are three major 'index funds' like this that include TSLA, two from Vanguard and one from Fidelity. These funds together hold ~6.5M TSLA shares.

Price Elasticity: Zero. The only reasons for index funds to buy and sell TSLA is people buying into / selling out of the fund, and TSLA being added to / removed from an index.

Retails

The last category of TSLA holders is retail investors. Tesla and its stock have one of the most fanatic followings of any stock out there. There's a large amount of TSLA retail investors, myself included, who wouldn't sell a single share, even if the SP doubled, tripled, or even quadrupled over night. You can't say that about a lot of stocks. Of course there are also retail investors who are less fanatic. I wouldn't be surprised if, especially during the last few months, a lot more people heard about and bought TSLA, who might not necessarily hold onto their stock until it's $5,000+ or $10,000+.

https://robintrack.net/symbol/TSLA

Robintrack backs this theory up. Going back as far as March 2018, never have less than 75,000 Robinhood users held at least a single share of TSLA, and especially since the start of this year there has been a new influx of Robinhood users adding TSLA to their portfolios.

Price Elasticity: It varies, similar to institutions, from very low to high. However, I think that the retail investors who are very price inelastic likely tend to hold far more shares than the ones that are more price elastic. I reckon that retails who strongly believe that TSLA will 10x over the next decade, are more likely to hold hundreds of thousands, or even millions of dollars worth of TSLA, and that retail investors who are less confident in the story or short term trading, are likely investing a much smaller amount. The latter are also likely to have bought in more recently at higher prices, and therefore likely couldn't afford as large a number of shares.

3. TSLA Holders Research

To gain more insight into TSLA holders, I've created a spreadsheet of the top 50 largest TSLA shareholders, with the help of SEC filings and fintel.io. The table is rather large, so if the images are difficult to view, it might be easier to open one of these files from Google Drive:

TSLA Holders Q4'19 PDF

TSLA Holders Q4'19 Excel

TSLA Holders Q4'19 Numbers

This first table shows the top 50 TSLA holders in # of shares:

This second table shows the top 50 TSLA holders in % of total shares outstanding:

There are two more useful pieces of information listed at the bottom of this table:

1. The % of shares outstanding held by all these holders in the top 50.
2. The shares available to investors as a % of all shares outstanding. This is calculated by adding the shares shorted to the total number of shares outstanding. It only goes back to Q1'19 though, because I've been unable to find exact short interest data from more than 12 months ago.

For this blog, there are two things I want to do with this information. First, I want to give a very brief overview of each of these holders, so that we can better understand who we're dealing with:

#1: Elon Musk (Insider - 21.3%)

No introduction needed.

#2: Baillie Gifford (Institutional - 7.6%)

https://fintel.io/so/us/tsla/baillie-gifford-

As you can see, Baillie Gifford has been invested in TSLA since mid-2014. Baillie is a hardcore believer in Tesla's future, and as a result it has so far never sold a significant amount of shares. Baillie is in it for long term 10x or more returns.

#3: Capital World Investors (Institutional - 5.9%)

https://fintel.io/so/us/tsla/capital-world-investors

Similar to Baillie, CWI is a long term TSLA investor. It's continuously increased its stake in the company except for 2016 when it temporarily slightly reduced its position.

#4: Vanguard Group Inc (Institutional - 4.6%)

https://fintel.io/so/us/tsla/vanguard-group

Nothing new here. Vanguard is another long term TSLA investor that has basically never reduced its position size, and has continued to accumulate over time.

#5: BlackRock Inc (Institutional - 3.7%)

https://fintel.io/so/us/tsla/blackrock

Same story with BlackRock. It'll be interesting to see if it's changed its position in Q1'20, because BlackRock made a massive announcement in Q1'20 about ESG investing, and TSLA is arguably the #1 sustainable future investment.

#6: Fidelity (Institutional - 2.9%)

https://fintel.io/so/us/tsla/fmr-llc

If you think Fidelity's current position of a little over 5M shares is large, look at Fidelity's TSLA position in early 2017. In Q1'17, Fidelity had a 14.9% stake in TSLA. It looks like it's recently began to slightly increase its stake again, but what a missed opportunity.

#7: Growth Fund of America (Mutual Fund - 2.8%)

There is no historic data available for mutual funds and index funds, but a quick Google search shows that this fund owned 4.69M TSLA shares as early as 2013, which means it's been invested since the stock was $20-30. This fund must really believe in TSLA for it to have increased its stake in spite of having already achieved 10x returns, so I think it's safe to assume it's in it for the long haul.

#8: Vanguard Total Stock Market Index Fund (Index Fund - 2.2%)

This fund mirrors the entire US stock market, of which TSLA is a part, so therefore it also holds TSLA. This fund's number of TSLA shares will only be impacted by people buying into and selling out of the index fund.

#9: Renaissance LLC (Institutional - 2.2%)

https://fintel.io/so/us/tsla/renaissance-technologies-llc

Renaissance is a legendary quant fund, meaning its investment portfolio is managed by a proprietary algorithm. The fund's returns are apparently so great, that it is no longer taking in any outside capital, and exclusively manages the money of the partners, and friends and family. Renaissance has held tiny TSLA positions a few times in the past, but this is the first time it's held a significant amount of TSLA shares. I'd imagine that at this point it has already sold out of most, if not all, of its position.

#10: Jennison Associates LLC (Institutional - 2.2%)

https://fintel.io/so/us/tsla/jennison-associates-llc

Jennison appears to more or less be an institutional investor with a long term horizon on its TSLA investment. Although it has slightly increased and decreased its position at various points in time.

#11: New Perspective Fund (Mutual Fund - 1.9%)

This fund is managed by the same company as #7: Growth Fund of America. Based on some Google searches, it seems likely that this fund added TSLA some time in 2018, although I have no way to be certain. As of Q3'18 it owned 2.62M TSLA shares, so it has slightly increased its holdings since then.

#12: Larry Ellison (Insider - 1.7%)

Larry Ellison disclosed a large TSLA position at the end of 2018. He seems to have reduced his position by 50% some time in 2019, but he added a very small amount of shares during the most recent public offering.

#13: State Street Corp (Institution - 1.7%)

https://fintel.io/so/us/tsla/state-street

Although State Street Corp doesn't have quite as large a stake in TSLA as the likes of Baillie Gifford and Capital World Investors, its conviction appears to be just as strong, because it has continuously added more shares, and rarely reduced its stake in the company.

#14: JP Morgan Chase & CO (Institution - 1.4%)

https://fintel.io/so/us/tsla/jpmorgan-chase-

Although you might think differently looking at the graph, I'd argue that JP Morgan is a long term TSLA investor, just not a very smart one. We'll see more examples of real short term traders soon, but JP's TSLA position has been somewhat consistent over time. You can clearly see that there were a few times where they made big adjustments to their position, such as Q1'16 and Q4'19, but for the most part it's been relatively steady. It'll be interesting to see next quarter whether JP has held on to the shares they bought fresh in Q4'19.

#15: Vanguard Extended Market Index Fund (Index Fund - 1.1%)

Another Vanguard index fund. This one mirrors about a quarter of the US stock market, but excludes the S&P 500, instead focusing on small and midsize company stocks. This fund will most likely sell TSLA when TSLA is added to the S&P 500.

#16: American Funds Insurance Series (Mutual Fund - 1.1%)

American Funds is the same company that runs #7: Growth Fund of America and #11: New Perspective Fund. When I first saw the name, I assumed this fund focuses on companies that offer insurance, and that TSLA was in it because it's launched its own insurance business. However, it appears to just be the name, and its holdings have nothing to do with insurance. TSLA is one of the fund's largest holdings, and I'd imagine that's not going to change any time soon, because the company running it seems to be quite fond of Tesla.

#17: Vanguard International Growth Fund (Mutual Fund - 1.0%)

I haven't been able to find out when this fund added TSLA to its portfolio, but with Vanguard being TSLA's 4th largest investor, I'd imagine it's going to keep TSLA in most of its funds for the foreseeable future.

#18: Invesco QQQ Trust (Index Fund - 1.0%)

This is a Nasdaq-100 Index Fund, so as long as Tesla's market cap doesn't drop below $10B or so, which is nearly impossible, this fund will hold onto its TSLA shares.

#19: Price T Rowe (Institutional - 0.9%)

https://fintel.io/so/us/tsla/price-t-rowe-associates-inc-md-

This is another story of what could've been. Price T Rowe used to be one of the big institutional TSLA bulls along with Baillie Gifford and Fidelity. At one point in Q3'18, Price T Rowe owned 10.1% of all TSLA shares, but it decided to offload most of its position after that, and has only held onto a minor stake since then. It increased this stake in Q4'19, but it doesn't seem likely Price T Rowe will jump back in in a big way now that TSLA is trading a lot higher than it used to.

#20: Bamco Inc (Institutional - 0.9%)

https://fintel.io/so/us/tsla/bamco-inc-ny-

Bamco is the classic example of a buy and hold long term TSLA investor, currently holding almost 1% of outstanding shares.

#21: Susquehanna International (Institutional - 0.9%)

https://fintel.io/so/us/tsla/susquehanna-international-group-llp

Susquehanna is most definitely not a buy and hold investor. According to this Wikipedia page, it has a quantitative trading algorithm, and it's also a designated primary market maker in ~600 equity options and 45 index options, including Google, Microsoft, and the Nasdaq. As of Q4'19, Susquehanna holds $4B worth of TSLA call options, and $8B worth of TSLA put options in addition to these 1.6M shares.

According to the SEC, short positions should neither be reported in 13F filings, nor subtracted from long positions:

Question 41

Q: What about short positions?

A: You should not include short positions on Form 13F. You also should not subtract your short position(s) in a security from your long position(s) in that same security; report only the long position.

I expect that the $8B of long TSLA put holdings and $4B of long TSLA call holdings, as well as Susquehanna's 1.6M TSLA shares are part of their options market making, although there is no way to be sure, because the SEC does not seem to care about keeping short sellers and market makers in check.

#22: Primecap Management Co (Institutional - 0.8%)

https://fintel.io/so/us/tsla/primecap-management-co-ca-

Primecap is a clear long term buy and hold investor. It was smart enough to increase its position substantially during the dip in Q2'19.

#23: Harbor Capital Appreciation Fund (Mutual Fund - 0.8%)

According to Google search, this fund was holding TSLA as far back as late 2014, so I think it's safe to say it's not in this to make a quick buck, but is in it for the long haul.

#24: Geode Capital LLC (Institutional - 0.7%)

https://fintel.io/so/us/tsla/geode-capital-management-llc

Geode Capital LLC is the only investor on this list to have never decreased its TSLA position during a quarter. Even Elon sold and gifted TSLA shares on a few occasions, but Geode has done nothing but add to its position.

#25: Sumitomo Mitsui Trust (Institutional - 0.7%)

https://fintel.io/so/us/tsla/sumitomo-mitsui-trust-holdings

A buy and hold institutional investor that, with great timing, increased its stake significantly during the last two years.

#26: D.E. Shaw & CO (Institutional - 0.7%)

https://fintel.io/so/us/tsla/d-e-shaw

Clearly not a buy and hold investor. According to D.E. Shaw's Wikipedia page, it relies heavily on quantitative algorithms, and it has posted the fifth-highest returns among hedge funds since inception. It looks like in Q4'19 D.E. Shaw's algorithm picked up on similar indicators as #9: Renaissance's algorithm, and decided to buy heavily into TSLA. I assume D.E. Shaw has already unloaded its position by now.

#27: Vanguard U.S. Growth Fund (Mutual Fund - 0.6%)

It looks like this mutual fund held TSLA at least as early as 2018. Combined with the fact that Vanguard is one of TSLA's biggest investors, I think it's safe to say this fund will continue to hold for the foreseeable future.

#28: JP Morgan Large Cap Growth Fund (Mutual Fund - 0.6%)

This fund was holding TSLA as early as 2013 according to Google.

#29: Baron Partners Fund (Mutual Fund - 0.6%)

Ron Baron is known as one of Tesla's biggest bulls through numerous CNBC appearances. He's the CEO of Baron Funds, so I'd imagine this fund is going to be one of the last to sell its TSLA stake.

#30: Fidelity Growth Company Fund (Mutual Fund - 0.6%)

Same story here. Fidelity is one of TSLA's biggest investors, so this fund is unlikely to go anywhere.

#31: Vanguard Growth Index Fund (Mutual Fund - 0.6%)

The same goes for Vanguard, one of TSLA's largest investors.

#32: Northern Trust Corp (Institutional - 0.5%)

https://fintel.io/so/us/tsla/northern-trust

A buy and hold institutional investor.

#33: Norges Bank ( Institutional - 0.5%)

https://fintel.io/so/us/tsla/norges-bank

Norges Bank seems to have been a TSLA believer for most of the time since it first invested in 2013. However, in the past year and a half, it seems to have increased its stake after good news came out (spikes in Q4'18 after stellar Q3'18, and in Q4'19 after stellar Q3'19), and to have decreased its stake when bad news came out (Q1'19 after bad news in early 2019). We'll see what happens going forward, but it seems to me like this investor is not that smarts and is influenced quite a bit by its emotions..

#34: Fidelity Blue Chip Growth Fund (Mutual Fund - 0.5%)

This fund held TSLA at least as early as 2017. It seems to have sold off about half of its shares since then, just like its parent company Fidelity did.

#35: Goldman Sachs Group Inc (Institutional - 0.4%)

https://fintel.io/so/us/tsla/goldman-sachs-group

I'm suspicious that, just like #21: Susquehanna, Goldman Sachs is a TSLA options market maker, because it's holding an extremely large number of both put and call options, to the tune of $4B and $500M respectively. Therefore, I believe that a large part, if not all, of the TSLA shares Goldman Sachs is holding are related to its options market making business, rather than an honest investment in the company. There will be more explanation on why an options market maker would hold shares in the next section on delta hedging.

#36: T. Rowe Price Growth Stock Fund (Mutual Fund - 0.4%)

This fund's TSLA holdings date back to at least 2018. It has since then sold a large number of shares, presumably at the same time the parent company Price T. Rowe did so.

#37: American Century Companies Inc (Institutional - 0.4%)

https://fintel.io/so/us/tsla/american-century-companies

A simple, straightforward, long term buy & hold investor.

#38: Legal & General Group PLC (Institutional - 0.4%)

https://fintel.io/so/us/tsla/legal-general-group

A long term buy & hold investor. The missing bar in Q3'19 is a data anomaly. According to this investor's Q3'19 13F filing, it did not suddenly sell its stake in Q3'19.

#39: Morgan Stanley (Institutional - 0.4%)

https://fintel.io/so/us/tsla/morgan-stanley

Originally one of TSLA's largest buy & hold investors, it looks like Morgan Stanley got impatient in mid 2017, and sold about two thirds of its TSLA stake. Either that, or there's still a tiny portion of Wall Street that respects Adam Jonas' opinion after all.

#40: ARK Investment LLC (Institutional / Mutual Funds - 0.4%)

https://fintel.io/so/us/tsla/ark-investment-management

It's surprising that the ARK funds don't show up as mutual funds in this list, but as an institutional investor that reports its holdings through 13F filings. I'm not sure why this is, nor how ARK is organized exactly. Either way, ARK is literally TSLA's biggest bull outside of insiders and certain retail investors. The only reason that ARK's position size has swung so much, is that they are not allowed to put more than 10% of any of its funds' portfolios in a single stock.

#41: Bank of New York Mellon Corp (Institutional - 0.4%)

https://fintel.io/so/us/tsla/bank-of-new-york-mellon

More or less a long term buy & hold investor.

#42: Nikko Asset Management Americas Inc (Institutional - 0.4%)

https://fintel.io/so/us/tsla/nikko-asset-management-americas

This appears to be a new addition to the TSLA buy & hold investor club, although I wouldn't be surprised if Nikko decreased its exposure and sold off part of its TSLA stake during the run-up in Q1, just as it increased its stake during the dip in Q2'19.

#43: Fidelity Extended Market Index Fund (Mutual Fund - 0.4%)

Another Fidelity fund holding TSLA.

#44: Deutsche Bank (Institutional - 0.4%)

https://fintel.io/so/us/tsla/deutsche-bank-ag-

It seems like Deutsche Bank is just like some retail investors, who have a core amount of TSLA shares and trade with the rest. However, Deutsche Bank does not seem to be very successful at this, because it increased its stake in late 2017/early 2018 during M3 ramp difficulties, yet sold before the turn-around Q3'18. And in the exact same way, DB added to its TSLA position in Q1'19 when the company went through difficulties, but then sold before it started to rally again after the epic Q3'19.

#45: Royal Bank of Canada (Institutional - 0.4%)

https://fintel.io/so/us/tsla/royal-bank-of-canada

Looking at this graph, one might conclude that RBC is an intelligent buy & hold TSLA investor that increased its stake right before the meteoric rise started. However, RBC is also the proud owner of $400M worth of TSLA call options, and $1.7B worth of TSLA put options, so therefore I wouldn't rule out that it is a TSLA options market maker, that simply increased its stake in order to delta hedge in some way. It's impossible to be sure which one it is, but time might tell.

#46: Ultra Fund (Mutual Fund - 0.3%)

I have been unable to find out much about this fund, or when it might've added TSLA to its portfolio, but I do know that TSLA currently makes up ~2.5% of this fund's $13B portfolio.

#47: Fidelity International Ltd (Institutional - 0.3%)

https://fintel.io/so/us/tsla/fil

TSLA currently only makes up a tiny 0.34% of Fidelity International's portfolio, so I'd imagine there could be room for growth here.

#48: Growth Account Class R1 (Mutual Fund - 0.3%)

It seems like this mutual fund added TSLA very recently, because it reported only a tiny 9,320 shares stake in Q3'19. It'll be interesting to see whether it keeps adding, or if it's satisfied with its current 576,504 shares position.

#49: Mitsubishi UFJ Trust & Banking Corp (Institutional - 0.3%)

https://fintel.io/so/us/tsla/mitsubishi-ufj-trust-banking

This Japanese bank appears to believe in Tesla's long term potential.

It seems like I only added the top 49 holders to my spreadsheet. Oh well, I guess that leaves room for improvement next quarter.

What we can learn from this data?

All of these top 49 largest holders combined, owned 82.7% of all outstanding shares as of the end of 2019, and the vast majority of them have held onto very large TSLA positions through a lot crazy swings over the past few years. If most of these investors held onto their TSLA shares in mid-2017 right before the launch of the M3, when Tesla was valued at ~$70B, brought in about $2.5B in revenue and lost hundreds of millions per quarter, it seems very unlikely to me that they will sell TSLA today at anything less than a couple hundred billion dollar valuation, because Tesla is now profitable, bringing in 3x as much revenue as it did 3 years ago, and is on the cusp of bringing in nearly 10x as much revenue after MY and MiC M3 ramps finish.

Some of these investors might want to reduce their TSLA exposure in $ terms during large TSLA run-ups, but nonetheless I believe TSLA has built up an enormous investor base that's going to be quite price inelastic, and is not going to sell (much) until TSLA is valued at hundreds of billions of dollars.

The second thing I want to do with this data

Is to look at how the supply and demand for TSLA shares has changed in the last few quarters. The only issue is that unlike 13F filings (institutional investors' portfolios), which remain searchable on the SEC's website for years, NPORT-P filings (mutual and index funds' portfolios) seem to only be listed on the SEC's website for a quarter or two. As soon as a new NPORT-P filing is listed, it seems like an old one is removed. Therefore, the "total #" and "total %" from Q4'19 and Q3'19 in the spreadsheet are inflated somewhat with mutual and index fund holdings, that are absent from earlier quarters.

So to more accurately look at how the supply & demand of TSLA shares changed, here is the same spreadsheet with the mutual fund and index fund data removed:

Looking at the total % of shares held by the top 49 holders (ex-funds), we can see that their total holdings increased from 111M shares(61.9%) at the end of Q2'19 to 123M shares(67.8%) at the end of Q4'19. Of course this does not include everyone, and a noticeable missing data point here is the Public Investment Fund of Saudi Arabia, which unloaded ~8M shares during Q4'19, but this still leaves a couple million shares increase in demand from the top 50 largest investors.

The much bigger change was the total number of shares available for trading. Due to the decrease in short interest from Q2'19 to Q4'19, this number dropped from 221M to 208M. As a result, the effective supply of TSLA shares dropped by almost 15M.

Naturally, such a large net change in supply and demand of over 15M shares is going to have drastic effects on the SP. And lo and behold, by the end of 2019 TSLA SP had shot up to over $400. But to fully understand what happened in the following 5-6 weeks, there is one other very important thing we must understand.

4. Delta Hedging

The TSLA options market is huge:

http://www.optionistics.com/screener/open-interest-highest-stock

TSLA may only be 24th on this list of largest options markets in terms of open interest, but I nonetheless wouldn't be surprised if TSLA's options market is far and away the largest stock options market in dollars as a percentage of market cap, because:

1. The top 10 on this list is all indices.
2. Most companies on this list have a much lower SP than TSLA. 3.8M options on GE (#12), a $7 stock, is going to be worth much less than 2.1M options on TSLA, a $500 stock.
3. The companies with a large SP on this list all have much higher market caps than TSLA. AAPL(#17), MSFT(#18), and BABA(#28) have large options markets and a fairly high SP, but their market caps are 5-10x TSLA's.

Now you might think, what does this have to do with anything? Well... options may be a different financial instrument, but they nonetheless influence the underlying stock's price through a mechanism called delta hedging, which is employed by market makers who are responsible for nearly all the options sales.

To explain how delta hedging works, I'm going to quote a post from r/teslainvestorsclub by u/Kirk57:

In June when the stock price was $180 Fred (being a very astute Tesla fan) realized, it was fundamentally very underpriced. Rather than buying more shares, he decides to buy call options at $750 / share that expire Feb. 7th. XYZ institution makes a lot of money by capitalizing on irrational dreamers like Fred. They looked at their data and realized no large company ever has stock that goes up 4X in less than a year. So they’re willing to sell Fred 10k options at $0.15 each.

Each option gives Fred the right to buy 100 shares of Tesla from XYZ at $750 any time over the next 8 months. So:

each option costs Fred $0.15 * 100 = $15.

10k options cost Fred $150k.

They give him the right to buy 1M shares of Tesla anytime on or before Feb. 7th for $750.

Fred’s breakeven point on the stock is $750.15. He would buy the 1M shares at $700, sell them at $700.15 and get his initial $150k back.

However if Tesla is at $1500 per share on Feb 7th, Fred buys the 1M shares from XYZ for $750, resells them for $1500 and makes $750M!

XYZ institution is sitting there in June feeling very happy with the $150k they got from Fred. Easy money!

In July TSLA goes back in the $200’s but XYZ is not that nervous.

Tesla releases the surprise Q3 results and Tesla soon jumps into the $300’s .

Now XYZ is a little nervous, so they buy 50k shares of Tesla stock. That way at least as Tesla rises, they’re protected a little in their bet, because they’ll have some of those shares, plus those shares appreciate, so it would mitigate their loss to Fred.

Tesla releases q4 and the stock jumps again. Now XYZ buys 200k shares of Tesla. XYZ and other institutions are now continually buying shares to hedge their bet against people like Fred, just in case they have to give him 1M shares below market value.

Basically, to protect sold call options market makers who sold them buy shares when the underlying's SP rises closer to the strike price, because they will have to sell 100 shares per option to the option buyer if the SP goes over the strike price. Similarly, if the SP drops, they will unwind some of these shares, because there is less risk they will have to sell 100 shares per option to the option buyer. This hedging of an option seller's risk is called delta hedging.

Sold put options work in the same way. When SP drops and closes in on a sold option's strike price, the market maker that sold them will sell shares (short) to hedge risk, because it will have to buy 100 shares per option at the strike price from the option buyer. And similary, if the SP rises, the market makers who sold put options will unwind this hedge and buy shares.

In case things are still fuzzy, here is one more great explanation from ASX.com about how delta-hedging the risk of sold options involves going long and/or short the underlying:

Market makers use a variety of approaches

Few, market makers if any, simply buy calls or sell puts when they are bullish and buy puts or sell calls when they are bearish. While most market makers will “scalp” or “leg” into spreads on a short-term basis, trying to take advantage of moves in the underlying prices is not generally their long-term strategy. The risk of simply taking directional bets, or taking on any one kind of exposure for that matter, is just too great; those who do don't survive over the long run.

All market makers attempt to control the risks of their positions, most of them by spreading options against other options or the underlying stock or index futures. Nearly every market maker is looking for a synthetic arbitrage trade – a trade that can be combined with other trades to produce a profit with very low risk.

To do this the market maker must know what is mispriced. In addition he needs to know how to hedge away the unwanted risks. If the market maker can enter two or more offsetting trades that cancel out the risk and do this for a net profit then he solved both problems.

Relative Pricing and Arbitrage Spreads

Market makers often don't need to worry about whether an option is actually over priced or under priced in some absolute sense. What matters is whether an option is mispriced relative to the underlying stock or to other options at any given point in time so they can create a spread and reduce the risk of buying or selling the option.

There are few basic arbitrage spreads that determine the price relationships that the underlying stocks and their various options should have to each other. When these price relationships don't hold, there is an opportunity for profit.  Market makers quickly learn to think in terms of synthetic equivalents –alternative ways of constructing a position. By buying relatively under priced and selling relatively overpriced combinations of puts, calls and stock that have the same risk exposure at the same time, the market maker can take advantage of any mispricing and cancel out his risk. In fact, this basic pricing technique is fundamental part of the way that market makers operate. Looking at option positions in terms of synthetic equivalents tells the market maker his alternatives. It is also key to understanding market makers ability to buy and sell options when the market appears to be heading in one direction and presumably no one else would take the other side.

An example:

Suppose ABC shares are trading at $10.

1.  If you own the stock, you gain and lose a dollar for every dollar the stock rises / falls      above /below $10

2.  If you own a $10 call, at expiry the call is worth a dollar for every dollar above $10

3.  If you're short a $10 put, you position is has lost a dollar for every dollar below $10

So the combination of 2 and 3 a long call and a short put, is synthetically equivalent to 1, owning stock. If the stock price rises a dollar the call is worth a dollar for every dollar above $10 and the short put is worthless. If the stock falls, the long call is worthless and the short put loses a dollar for every dollar below $10.

At expiry the combination of 2 & 3 (long call, short put) will show the same net gain or loss with any change in the stock price. Thus by buying one and selling the other you can eliminate the most significant form of position risk, exposure to the direction of price movement. Buying stock and selling synthetic stock, or the reverse, results in no net direction exposure. The positions cancel because what you make on one you lose on the other.

Not only is there a synthetic equivalent for owning stock, there is a synthetic equivalent for any option or stock position.

Table 1

Position	Synthetic Equivalent
Long Stock	Long Call + Short Put
Short Stock	Short Call + Long Put
Long Call	Long Stock + Long Put
Long Put	Short Stock  + Long Call
Short Call	Short Stock  + Short Put
Short Put	Long Stock  + Short Call

Conversions and Reversals

The two most basic forms of option arbitrage are the “conversion” and reverse conversion or “ reversal”. If a market maker can buy stock and sell synthetic stock (or the reverse) for a net price difference that will more than cover his costs, then the combination of trades ought to make a profit with no directional risk. What matters is not the price of the call or the put or the stock itself in isolation, but the relative prices of the offsetting pieces.

An example:

Suppose a market maker finds the 10 calls, expiring in one month, trading at 45c and the puts at 35c with the underlying trading at $10. The market maker simply puts the three pieces together- selling the call, buying the put and buying the stock. He takes in 10c and at the same time hedges a way his exposure to any changes in the price of the stock. Lets assume that the carrying the stock until expiry costs $10 x  5% x (30/365) = 4c. his net profit on the position, assuming no other costs and no other risks is about 6 cents, which can earned with no price exposure. All calculations should be multiplied by 100 because options cover 100 shares.

There is no reason to think of a conversion exclusively in terms of buying share s and selling them synthetically. From table 1, it is clear that a conversion can be viewed in terms of other pieces. A conversion can be either a long call and a short synthetic call, or a short put and a long synthetic put, as well as long stock and synthetic short stock.

The opposite strategy, a reverse conversion or reversal, can be established if the call and put prices were out of line in the opposite direction. If, for example, the 10 call were offered at 40c and the put bid at 38c, market maker could buy the under priced call, sell the expensive put and sell the stock short for a net debit of 2c. He could then earn interest on the $10 he received from the sale of the stock to generate a net positive return with no directional exposure.

As the current level of interest rates determines whither a conversion or reversal will be profitable these spreads are known as interest rate plays. Using his own appropriate current interest rate, a market maker calculates his cost of carry for the position on including the receipt of the dividend (long stock ) or the payment of one( short stock). He then knows the size of the credit or debit that would make a conversion or reversal profitable, and can examine current option prices with those values in mind.

Market makers are subject to interest rate risk prior to expiry. An increase in rates, increases the cost of carry, a reduction in rates, reduce the size of the interest earned. For this reason market makers generally try to balance the number of conversions and reversals.

Other risks

Changes in implied volatility levels and to dividends are other risks that market makers deal with on an ongoing basis. Whilst neither of these should be underestimated none is as great as directional price risk. Competition among market makers often forces them to accept risks just to be included in trades, however most will not accept directional risk for more than a very short time.

To help explain in detail how all of this affects TSLA, I'm going to quote user ReflexFunds from TMC. He's one of my favorite TMC posters, and you can find him on Twitter here. This post is from the 17th of December 2019, so it describes the situation as of that time, just before TSLA's meteoric rise started.

Full detail on all Tesla options value and delta exposure from calls, puts and converts below. These are approximations, but I think close enough.

Tesla Calls open interest:

There are call options on 105 million shares outstanding.

The current market value of all call options is $3.6bn with $0.8bn expiring this week and $1.8bn expiring within the next 3 months. $3.1bn of the calls are in the money and $0.5bn out of the money.

Delta hedge requirement for these call options is 38 million Tesla shares, worth $14.5bn.

So if all Tesla calls were sold by market makers (most likely were) and are 100% delta hedged (market makers should be), then 38 million shares would have to be held to hedge the option position. In reality some of this is cancelled by Put options.

Tesla Puts:

There are put options on 135 million shares outstanding.

The current market value of all put options is now only $0.4bn with $82m expiring within the next 3 months.

Delta hedge requirement for these put options is 5.5 million Tesla shares sold short, worth $2.1bn.

Convert hedges owned by Tesla:

Tesla bought call options and sold warrants to limit potential dilution from its 2021, 2022 and 2024 convert issuance. The value of the Tesla calls Tesla owns are currently worth $1.7bn and the Warrants it sold worth $0.8bn. For banks to delta hedge their net option exposure to Tesla from the calls & warrants would require purchasing 4 million Tesla shares.

Net delta exposure from options market.

The gross delta exposure from Calls, Puts and Convert Hedges can all be netted out – they are all likely held by the same market makers. So this is 38.1 million long from Call open interest, 5.5 million short from Put open interest and 4.0 million long from Tesla’s convert hedging transactions. This nets out at 36.6 million Tesla share long, currently worth $14.0bn.

Note that while individual market makers can delta hedge with other options rather than shares (but they mostly use shares), this is only passing on delta exposure to a different market particpant and not hedging exposure of the overall options market net exposure. So this 37 million shares overall options market delta exposure is what is needed if everybody is 100% delta hedged. Some calls will be sold unhedged by people like Mark Spiegel etc, some puts likely sold by Tesla retail longs, but I expect the vast majority of the market is delta hedged most of the time. So these means delta hedging accounts for ownership of towards 37 million Tesla shares currently. This is relative to 209 million total Tesla shares (180 million real shares outstanding, 29 million virtual/duplicated shares sold by shorts). Many of these market makers likely loan their long shares to shorts so they may not disclose ownership anywhere close to their real economic ownership of stock.

Convertible bonds:

Most convertible bonds will be held by funds who will delta hedge their exposure to Tesla equity. At current prices this would require selling 9.3 million Tesla shares short. So this is likely a large chunk of the 28.7 million Tesla short interest. These are held by different investors to the options open interest so can not be netted out with the options delta hedging requirement.

Outright short equity:

Short interest is currently 28.7 million shares sold short or c.$14bn. About 20 million of these shares or c.$7.4bn are likely sold by real shorts and not from convert hedging. These 29 million short shares are shares that are now owned by 2 different long investors. The short borrowed a share from one long, promised to give it back eventually, then sold it to a new long. Two different long investors now have economic ownership of the same share so in effect the share has been duplicated, with a virtual share or repayment obligation now also trading in the market. This means there are now really 180 million real shares outstanding plus 29 million virtual shares owned by Tesla longs, or a total of 209 million shares.

What is the exposure of all of these positions to a +$10 move in Tesla share price?

For +$10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is + 3.6 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism to drive the stock higher.

For +$10 share price the size of the Tesla short owned by real shorts will increase in $ terms. To maintain the same $ size of position Tesla short will have to buy Tesla shares to reduce the number of shares short. For $10 this would have to be 0.7 million shares.

So between the two, this is buying pressure for 4.3 million shares due to a $10 increase in share price.

What is the exposure of all of these positions to a -$10 move in Tesla share price?

For -$10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is -4.2 million shares or $1.6bn of Tesla stock sales. This is again a powerful feedback mechanism to drive the stock lower. At the moment the mechanism is slightly more powerful in the downward direction – this is because the recent price increase has moved so many Tesla calls into the money and delta to its maximum of 1. There is more room for changing in delta with downward movements currently. This will likely even out as calls mature and people roll calls into more out of the money strikes.

For -$10 share price the size of the Tesla short owned by real shorts will reduced in $ terms. To maintain the same $ value, Tesla shorts will sell a further 0.8 million shares short.

So between the two, this is selling pressure for 5.0 million shares from a -$10 move in stock price.

Note: All these numbers are approximations and use a $381 share price and a fixed 45% volatility for all options/strikes/maturities. I don’t have a data source with volatility or option price for every option matched to open interest, and these approximations makes it much easier to make quick options pricing calculations.

So in essence, the enormous TSLA options market forces options sellers to delta hedge; buy a lot of shares as the SP goes up, and sell a lot of shares as the SP goes down. This creates a feedback mechanism of epic proportions, because buying shares as the SP goes up causes the SP to go up further, which leads to more forced buying of shares by market makers to stay delta neutral. Similarly, selling shares as the SP goes down causes the SP to go down further, which leads to more forced selling of shares by market makers to stay delta neutral.

Now we've covered everything we need to know in order to understand what happened to TSLA in the months leading up to early February of this year.

5. The Story of TSLA's Meteoric Q1'20 Rise

Our story starts in mid October 2019, right before Tesla Q3'19 earnings. Short interest was at 37M shares, only down a few million shares from ATHs a few months prior. Expectations for the Q3 financial results were mixed, and many speculators were expecting a drop just like after the Q2'19 ER.

On the 23rd of October 2019, Tesla didn't just surprise the people who were expecting disappointing financials but also the biggest bulls, when it announced arguably its best quarterly performance ever. Margins improved drastically, costs were reduced across the board, and a lot of good news around Giga Shanghai and Model Y progress was made public.

Unsurprisingly, the SP soared from the mid $200s to the low $300s. Over 5M shorted shares were covered, a bunch of new investors bought in, and also a couple of investors decided to cash out, most notably the Saudis.

Fast forward a bit to early-mid December and SI had dropped by another ~4M shares, further lowering the supply of available shares. The SP hadn't moved that much yet though, so it's likely that some investors were still cashing out. The Saudis unloaded 8M shares in Q4'19 after all. Selling this large a number of shares takes some time.

In mid-December, the SP was around $350, and then this happened:

During the last few weeks of December TSLA surprised many by breaking through its previous ATH of $380, making swift work of the $400 barrier, and finishing the year at a befitting SP of ~$420.

The year 2019 was another in which Tesla made a ton of progress as a company:

• Giga Shanghai went from a mud field to a factory capable of producing 1k vehicles per week.
• Tesla unveiled and all but started production of the Model Y.
• Tesla showed the world its lead in developing autonomous vehicles.
• Tesla massively improved its operating margins killing multiple bear theses all at once, and bringing S&P 500 inclusion ever closer.
• Tesla properly launched the Solar Roof.
• Tesla announced plans to scale up to 2TWh of in-house battery cell production.
• Tesla unveiled the Cybertruck.
• Tesla announced the location and timeline of its European Gigafactory Berlin.

Yet, Tesla's valuation stayed nearly flat. This means that all of Tesla's long term investors at the end of 2018 probably increased their, after years of trading sideways already inflated, price targets even further. Therefore, at the end of 2019 Tesla had accumulated a massive, very price inelastic investor base.

Meanwhile, SI dropped by another 2M shares to a twelve month low, and shorts couldn't have been particularly happy about the situation they were in. All of the TSLA short theses were crumbling, if not gone already, and as a result many shorts were getting cold feet. Last but not least, every single TSLA short seller was now down a significant amount of money on their 'investment', even before accounting for interest payments.

As a result of all this, at the end of 2019 TSLA liquidity was very low. The available number of shares was way down from earlier in the year, a lot of longs were stubborn and had price targets far in excess of $420, and the state of mind of the shorts was only making things worse.

Looking back, it's no surprise that TSLA started off 2020 with a bang. During the first week and a half, the SP rose another 20% to $500 on the back of a strong P&D report, and another 1M shares sold short were covered and removed from the pool of available shares.

Trading volume also started to increase significantly around this time. A pretty random January 8th saw 31.14M TSLA shares trade hands, which was one of the highest volume days in TSLA's history, more than the days following TSLA's amazing Q3'19 ER. In terms of dollar amounts it was far and away the most dollars worth of TSLA shares that had ever traded hands in a single day.

As for the reason behind this sudden increase in shares volume we can only speculate, but perhaps the delta hedging mechanisms started to further accelerate SP around this time, perhaps the rally got more traders to take a look at the stock, or perhaps the BlackRock ESG announcement had something to do with it.

Any way, mid January saw a bit more volatility and some red days. Nonetheless volume remained extremely high, and the SP managed to reach above $550. Late January was a bit of a breather as the market eagerly awaited Q4'19 earnings.

Those Q4'19 earnings turned out to be well above the market expectations, and as a result the SP quickly shot up to $650, and by the end of the month TSLA SI dropped another 2M shares to a multi-year low.

What followed on February 3rd and 4th, after the market had had the weekend to properly digest TSLA's Q4'19 ER, were two of the most insane trading days I think anyone will ever see in a company of TSLA's size ($100B+).

At this point:

• Liquidity was extremely low, due to stubborn longs and a massive reduction in the supply of shares.
• Many shorts who had had the weekend to digest the financials decided they wanted out, and TSLA SI saw a reduction of another almost 5M shares over the following two weeks.
• Many investors decided during the weekend that they wanted in on TSLA.
• Media attention around the stock was getting absurd, to the point where if you typed "Should I" into Google, the #1 recommendation was "Should I buy Tesla's stock?".
• Traders were trying to take advantage of this highly volatile stock.
• Market makers, who had to buy shares to delta hedge their sold options, drove up the SP and forced themselves to buy even more shares in order to stay delta neutral.

This resulted in a company valued at ~$120B one morning, being valued at over $180B approximately 30 hours later, while nearly $100B worth of its shares traded over the course of two trading days. Almost 110M TSLA shares were traded on the 3rd and 4th of February at an average price of somewhere in between $800-900.

Crazy stuff...

Conclusion

Although this kind of data is great for piecing together what happened in the past, I think it holds limited potential for predicting the future, especially because there's a few months delay in reporting. Nonetheless, I think it's pretty interesting to keep track of who's invested in Tesla, so I plan to keep this spreadsheet up to date, and I will probably post it here around the end of every quarter.

I wrote about half of this blog earlier this month, then took a long break because I got frustrated with the missing Mutual Funds and Index Funds historical data, and then finished the rest over the past few days. I hope that in spite of this the story is coherent.

I'll probably post my Q1'20 ER Forecast some time later this month after Tesla has confirmed the final production and delivery numbers.

Until then, stay safe and healthy.

Frank