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Kass: How I Shorted Tesla and Survived

Stocks in this article: TSLAAAPL

The purpose of this column is to explain my risk profile and how my approach to shorting stocks keeps me in the game, even when I am terribly wrong on a stock.

Today's lesson employs Tesla (TSLA).

Tesla's shares have risen dramatically over the past 12 months.

Its year-to-date advance has also been breathtaking.

In several posts, I outlined why I was shorting Tesla this year.

In shorting Tesla, I recognized that I went directly against my short selling tenets that preclude me from shorting a stock on valuation and when short interest is high relative to float and to average daily trading volume, but sometimes you just have to make an exception if a situation is viewed opportunistically.

To summarize, I began to short Tesla at around $205 when the stock rose on a combination of modestly better-than-expected earnings and rumors that Apple (AAPL) had discussions with Tesla. The latter point was plain foolish to me and provided a price gap that I felt delivered a reasonable short entry point.

I shorted more Tesla on a gap up to $220 soon after and covered some stock on a dip back to $207.

But the first several shorts were small, as I almost always average in, especially when dealing with a high-octane stock such as Tesla.

The share price continued to rise to $240 where I got more serious in shorting the shares.

As the share price rose to over $260, I continued to average into the short.

At around $251 I covered some of my high-priced shorts, and at $236 I covered the majority of the balance of my short.

I recently added (small) again at around $256.

The sum total of my loss in the short of Tesla has been negligible, literally a rounding error in the scheme of my overall investing activity.

The lesson: Recognizing the mania and the stock's volatility, I started slow (and small), expanded the short modestly on strength, traded around the position often and sized the position properly.


This column originally appeared on Real Money Pro at 10:04 a.m. EST on March 6.

At the time of publication, Kass and/or his funds were long AAPL and short TSLA, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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