My goal with the blog was to start with the basics about investing and gradually get more complex, but I think this is a pretty cool and true story that I think you will enjoy. It is about investing in stock options, so I added lots of links to Youtube videos that explain concepts I haven’t talked about on the blog yet.
Please be aware that the story you are about to read does not happen everyday, every week, or even every year- in fact the events that allowed this return happen pretty rarely. So don’t quit your day job just yet. Also, big shout-out to one of my brilliant friends, Ryan. Ryan correctly predicted Tesla was headed towards a “short squeeze” and told me to look into it weeks before it happened. Be sure to look out for Ryan’s hedge fund in the not too distant future.
Setting the scene
This all happened the week of February 2nd 2020. Tesla had run up from a share price of $243 on October 2nd, 2019 all the way up to $673 on the morning of February 3rd. That is a return of 177% in just 4 months!! I had bought and sold the stock at various times in the last 4 months and still had stocks going into this week. During these 4 months, Tesla was making headlines in the news with stellar earnings reports and high expectations for their new upcoming products, including the Model Y, Tesla Semi and the controversial Cybertruck (I promise you won’t regret clicking the link). To balance out these positive vibes and high hopes, there were still lots of investors who did not believe in Tesla and were short selling the stock, thinking the stock price would crash at some point. Going into this week, the analysts’ average forecast share price was between $650-750, with some estimates going as high as $4000/share and as low as $300/share. In other words, there was no consensus on how much a share of Tesla should be worth but the stock price just kept going up…
Enter the Short Squeeze
As I mentioned into the intro, my brilliant friend Ryan told me a short squeeze was coming. The problem is, I had no idea what this meant. So I read every article I could on short squeezes and came to the following conclusions:
a) Tesla was likely headed towards a short squeeze
b) No one really knows exactly when a short squeeze will happen
c) There was the potential to make a lot of money off of this short squeeze, if I played it right
But what is a short squeeze??
Click the link to find out the nitty gritty details but please be warned it is a bit complex, especially for novel investors. As a super basic description, there are 3 key markers of a short squeeze:
Marker #1) Stock price skyrockets (as high as 30%, 40% or even more)
Marker #2) Stock price plummets
Marker #3) Markers 1 & 2 both happen within a day or two.
Short squeezes happen from time to time but not usually on the scale that Tesla was headed towards, and is the same phenomenon that made Volkswagon the most valuable company in the world in 2008, for a very brief period.
The Big Week
Monday, February 3rd:
Stock opens at $673 and before lunch the stock ran up to $725! At this point, I wanted to lock in profit and sold all of my remaining shares. I was pretty happy with this return but I still wanted to try and profit off of the short squeeze. So after my work day, but before the market closed (~4:00PM), I bought a two call options for Tesla to hit a share price of $910 by Friday February 7th. The options cost me ~$800 and a big part of me felt that I was going to lose this $800 by Friday. But on the other hand, if I catch the short squeeze, it could be worth a lot more than $800. That day, the share price closed at $780, which was an increase of 16% in just one day.
Tuesday, February 4th:
As soon as I woke up on Tuesday (~6:00am), I checked how Tesla was doing and to my surprise, in pre-market trading (before the stock market even opened), the Tesla share price was up $80! Could today be the day of the short squeeze? I happened to be carpooling to work with my wife this day so I asked her to hit refresh on the stock price the whole way to work and sure enough the stock price kept going up. By the time the market opened the share price had jumped to $883, almost $100 higher than the previous day’s closing price.
When I opened my trading account to check the option price, I really didn’t know what to expect – I knew I made some money, but how much money was the question. I opened my trading account and to my surprise the option at 500% profit!! This meant my $800 turned into $4000 profit. Damnnnnnnnn I thought to myself.
I hit refresh and bam 600% or $4800 profit
Refresh, 700% or $5600 profit
Refresh, 800% or $6400 profit… MIND BLOWN
Every time I hit refresh, the option had made more money.
The short squeeze was definitely in progress. I took a minute to compose myself and talked to a calm friend and sold the options at 1500% profit, even though part of me thought I could made even more money if I held on longer. But, as my friend put it, are you really going to regret making 1500% profit? So between 4:00PM on Monday night and 9:45AM on Tuesday morning, I made $11,000 profit. It felt pretty awesome.
Now that I had made money on marker #1 of the short squeeze (stock price skyrockets) why not try to make money on marker #2? After all, I did just make my most profitable trade ever. So I then bought 2 put options betting on the share price of Tesla dropping. The put option I bought was for Tesla to drop to a share price of $730 by February 14th. The options cost me $2800, which was pretty expensive, but again I was riding this high of making $11,000 before my first meeting of the day. By the end of Tuesday, Tesla’s share price was still on the rise and closed at $887.
Wednesday February 5th
Just like Tuesday, I was constantly hitting refresh on the Tesla share price within my Yahoo Finance app before the market opened. But unlike Tuesday, the share price was dropping and Tesla ultimately opened at $823, down $64 right at market open. This was a happy sight! Looks like this option was going to make money too. I managed to refrain from selling until mid morning when it looked like the stock had stabilized for a moment. I ended up selling the options at $5000 profit at around 10:30AM with the Tesla share price around $760. Not bad at all. It turns out that I had sold the options at the end of the day they might have been worth 5x more, but there is no way I could have known that at the time of selling. Overall, I made far more money in these 2 days than I could have guessed.
Options are risky and timing the market is generally not advised BUT this one crazy week I made $16,000 profit between Monday 4PM and Wednesday 11AM with options trading and successfully timing the market, thanks to the Tesla short squeeze. What a week! Thanks Elon!
Hope you enjoyed the story and the explanatory links, in my next blog post I will go back to the basics and cover “spending money to make money”.