Tesla's stock is in unprecedented territory that could completely overhaul how it's traded

Reuters / Kyle Grillot

• Elon Musk has waged a long-running battle against Tesla short sellers, who have bet against the company's stock for years.
• In recent weeks, an interesting development has occurred in the Tesla short universe, and it could dictate how the company's stock trades in the future.

Elon Musk's long-running battle with Tesla short sellers is the stuff of legend at this point.

The majority of his crusade has been waged on Twitter, where he's repeatedly taunted the futility of short sellers and decried their mere existence. In a Rolling Stone profile last year, he called them "jerks who want us to die." He's even called their behavior flat-out illegal.

But Tesla's short-seller landscape has undergone some big changes in the last few weeks, to the point that it's almost unrecognizable from the pessimistic wasteland that it once was.

As shown in the chart below, the number of Tesla shares borrowed has declined to a year-to-date low, around 22 million. It also shows that multiple measures of short interest - or bets against Tesla's stock - are also at 2018 lows.

In other words, it's never been easier to short Tesla - and that's largely because wagers against the company have dried up, at least relative to the stock's history.

IHS Markit

"While the share price has bounced 39% off the YTD low, and is only 15% below the all-time-high observed in June 2017, bears can at least enjoy a lower cost of admission to the short trade, for the time being," analysts at IHS Markit said in a recent client note.

IHS Markit also points out that lenders are reporting 16 million shares - or $5.4 billion - available to borrow, both of which are post-initial public offering highs for Tesla.

But why the recent capitulation on behalf of the shorts? Tesla's blockbuster third-quarter earnings report may have something to do with it. The company reported a surprise profit for the period, which sent its stock soaring 13% in a single day, and pushed it up 29% for the week. That type of drastic price action can be catastrophic for shorts.

"Given the Q3 earnings results, and the market reaction to them, it's no surprise that bears have reduced the position on the margin and that some investors have positioned themselves to benefit from further short covering and continued enthusiasm from the firm's investor base," analysts at IHS Markit said in a recent client note.

With all of that in mind, what's the significance of these developments, in terms of how Tesla's stock will now trade? The straightforward takeaway would seem to be that it's now free to keep rising, unencumbered by the shackles of short sellers. But it's not that simple.

The dormant potential for sudden shorting activity actually makes Tesla's stock more vulnerable to a sharp downturn. Shorts are historically cheap, and there's ample supply, so if things start to go south again for Tesla, skeptics will be ready to pounce.

It's essentially the inverse of what played out in May, when Tesla shares were prohibitively expensive, which put shorts on autopilot and left the price action up to long holders.

But the prospect of betting against Tesla isn't quite as appealing as it once was. The company is profitable, and Musk's multiple missteps seem to be firmly in the rear view. For evidence of this waning skepticism, look no further than the cost to protect against a Tesla default. Shown by the green line in the chart below, it also is hovering near lows.

Ultimately, betting against Tesla is getting to be a riskier proposition. All of the statistics laid out above confirm that. The question investors must now ask themselves is whether it's best to scoop up Tesla short exposure at discount prices, or stay out of the fray entirely.

IHS Markit

Get the latest Tesla stock price here.