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There's a little known aspect of Tesla's potential S&P 500 membership: currently TSLA is not part of the S&P 400, the midcap index.
Why is this relevant? Most index funds already own S&P 400 names, and joining the S&P 500 is a simple matter of transferring shares internally.
There's a little known aspect of Tesla's potential S&P 500 membership: currently TSLA is not part of the S&P 400, the midcap index.
Why is this relevant? Most index funds already own S&P 400 names, and joining the S&P 500 is a simple matter of transferring shares internally.
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But it's very rare for a company to not be part of the S&P 400 when it joins the S&P 500.
In this special case funds benchmarked to the S&P 500 will have to buy tens of millions of TSLA shares from the open market and hold the shares - reducing the float significantly.
But it's very rare for a company to not be part of the S&P 400 when it joins the S&P 500.
In this special case funds benchmarked to the S&P 500 will have to buy tens of millions of TSLA shares from the open market and hold the shares - reducing the float significantly.
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So TSLA "jumping" on the S&P 500 without the interim step of the S&P 400 creates huge buying pressure that is underappreciated by the market.
TSLA will join the S&P 500 if it posts a marginal profit in Q2, but this is highly uncertain, so funds cannot buy in advance.
So TSLA "jumping" on the S&P 500 without the interim step of the S&P 400 creates huge buying pressure that is underappreciated by the market.
TSLA will join the S&P 500 if it posts a marginal profit in Q2, but this is highly uncertain, so funds cannot buy in advance.
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Can funds buy options instead? This arbitrage opportunity is closing as well, because options premiums past the Q2 earnings report are already over $100 for near the money options, higher than 10% of the underlying.
Can funds buy options instead? This arbitrage opportunity is closing as well, because options premiums past the Q2 earnings report are already over $100 for near the money options, higher than 10% of the underlying.
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For example September $950 call options are currently trading at around $125, which represents a 13% premium. Any fund buying such options risks losing that hefty 13% price on a speculative bet to front-run TSLA S&P 500 inclusion.
For example September $950 call options are currently trading at around $125, which represents a 13% premium. Any fund buying such options risks losing that hefty 13% price on a speculative bet to front-run TSLA S&P 500 inclusion.
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Of the global ~10 trillion dollars of investment assets benchmarked to the S&P 500, about 0.6% or ~$60b would have to purchase TSLA on inclusion, to simply become benchmark-neutral.
Of the global ~10 trillion dollars of investment assets benchmarked to the S&P 500, about 0.6% or ~$60b would have to purchase TSLA on inclusion, to simply become benchmark-neutral.
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I believe only a fraction have done this so far, which sets up a potentially huge self-reinforcing event once TSLA's S&P 500 inclusion probability reaches 100% on Q2 or Q3 profitability.
I believe only a fraction have done this so far, which sets up a potentially huge self-reinforcing event once TSLA's S&P 500 inclusion probability reaches 100% on Q2 or Q3 profitability.
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All the funds that "missed out" will have to scramble to acquire the required shares - and if TSLA rises rapidly as a resulting buying pressure, the urgency to buy TSLA will increase in a positive feedback loop.
All the funds that "missed out" will have to scramble to acquire the required shares - and if TSLA rises rapidly as a resulting buying pressure, the urgency to buy TSLA will increase in a positive feedback loop.
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The comparatively still very high short interest in TSLA (12% of the float compared to ~2% for similar high-tech firms) might further add rocket fuel to this phenomenon, in form of short covering.
The comparatively still very high short interest in TSLA (12% of the float compared to ~2% for similar high-tech firms) might further add rocket fuel to this phenomenon, in form of short covering.
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In particular long-short funds that are dominantly benchmarked to the S&P 500 will have significant incentives to close their equity short TSLA positions.
In particular long-short funds that are dominantly benchmarked to the S&P 500 will have significant incentives to close their equity short TSLA positions.
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TL;DR: the "jump" to the S&P 500, combined with short covering, combined with very high options premiums might set up a gigantic buy event that could eclipse even the big short squeeze of TSLA earlier this year, when it catapulted by +$700 from ~$250 to ~$950.
TL;DR: the "jump" to the S&P 500, combined with short covering, combined with very high options premiums might set up a gigantic buy event that could eclipse even the big short squeeze of TSLA earlier this year, when it catapulted by +$700 from ~$250 to ~$950.
