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TheStreet Open House

Tesla's Index Entry Is a Two-Sided Coin

NEW YORK ( TheStreet) -- Tesla Motors (TSLA) shareholders have the top down, wind blowing in their hair, a charged battery, and a sun-soaked day as they cruise Wall Street at a closing high of $123.44 Tuesday.

Tesla shareholders have plenty of company to keep the party going. Shares in Ford (F) also hit new 52-week highs this week, and the new General Motors (GM) isn't more than a car length behind. Tesla has more than an improving automotive sector to thank.

Gaining entry into the Nasdaq 100 Index / PowerShares QQQ (QQQ) raises the stature of the company. Other companies on the top 100 list include Apple (AAPL), Google (GOOG), and Cisco (CSCO).

List inclusion guarantees new buyers of the stock. Index funds will sell the soon-to-be departed Oracle (ORCL) shares as Larry Ellison's company goes to the NYSE Euronext (NYX) and use the funds to purchase shares in Tesla.

List inclusion isn't a totally free ride, though. Shareholders busy popping corks and celebrating Tesla's entry into the index may not have thought about the darker side of inclusion. At the same time funds are rebalancing positions out of Oracle and into Tesla, other funds, notably short-selling hedge funds, are reviewing their positions, too.

Undoubtedly, some short sellers are willing to throw in the towel, lick their wounds, and walk away. But I'm not referring to those funds. I'm referring to the funds with a long-term short bias opinion that can maintain their short positions indefinitely without worrying about finding borrows or interest.

Yes, the index membership coin has two sides -- one side increases the demand for shares and the other side decreases the obstacles of shorting. Let me explain how "normal" short selling works, and then how "synthetic" short selling works, and it will make sense.

Normally, in order to short a stock, the seller must find shares he can borrow, and if he is able to locate shares, he sells the borrowed shares on the market. The investor can subsequently buy, and return the shares anytime, but sometimes the lender wants the shares back earlier than expected -- the owner can request the return anytime -- and the short seller must deliver the shares, either through finding another party to loan shares, or through purchasing shares on the open market.

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