How to Short a Stock + Example: TSLA Stock

A Practical Guide to Mastering Stock Shorting

Shorting a stock can be a highly effective strategy, but it’s not for the faint of heart. It involves borrowing shares, selling them at the current price, and buying them back later at a (hopefully) lower price. However, the risks are significant—losses are theoretically unlimited, and fees can be steep, sometimes exceeding 100% annually. Stocks like GME have shown how dangerous shorting can be for retail investors.

If done correctly, though, shorting can yield exceptional results. This guide lays out an 8-step strategy for shorting stocks, using TSLA as an example.

Before You Begin: Tools and Knowledge

Short selling requires proper preparation, the right resources, and a clear understanding of the steps to success. Here’s a brief overview of what you need.

• A Reliable Broker: Choose a broker that supports short selling, like Alaric Securities, which offers access to U.S. stocks and transparent borrowing fees.
• A Platform with Borrowing Options: Use a professional platform like Hammer Pro, which is equipped with tools for borrowing shares, short selling, and risk management.
• Understand Borrowing Costs: Know the fees tied to borrowing stocks, which vary based on availability. Check if the stock is “Easy to Borrow” (lower fees) or “Hard to Borrow” (higher fees).

Now that you’ve set up your tools and understand the fundamentals let’s explore the step-by-step process for shorting stocks, using TSLA as our example.

Step 1: Focus on Large-Cap Stocks (≥ $100B Market Cap)

As we mentioned earlier, shorting can be dangerous. One of the biggest dangers is that the company’s market cap and float available to short may be too small. Tesla (TSLA) has a market cap of over 1 Trillion USD. The stock is easy to borrow, meaning that the cost of shorting is less than 5% annually. This is as good as it gets.

Step 2: Limit Buy Ratings to <50%

Over the last three years and at present, the stock should have had, on average, no more than 50% Buy recommendations. Ideally, we should see Sell and Strong Sell recommendations above 10% of all recommendations.

It is rare for analysts to give Sell recommendations. Most times, Hold recommendations are “soft” Sell recommendations. Nevertheless, the most important characteristic of this step is the absence of Buy recommendations. As you can see, it is scarce for TSLA to gather more than 50% of buy recommendations.

Stock analysts do not usually like stocks; at present, only 38% of analysts recommend buying them, while nearly 25% think they are a Sell or a Strong Sell. That big percentage of Sell recommendations is actually quite rare.

Step 3: Current Price >25% Above Average Target

The current price should be at least 25% higher than the average price target.
This is the Price Target of TSLA:

The price of TSLA, at 338.74 USD, is more than 30% higher than the average price target. This critical thing to remember is that such a scenario has happened to TSLA before. In the 2020-2022 period, the price has regularly exceeded the average price target, but that extreme has never gone above 40% and has always gone down to trade at its price target.

We think this is also the most likely scenario for the present. The stock may go up even more, but it is unlikely to be that much more. This is a huge company, and stock analysts have proven here that their price targets are relevant to the stock’s future price.

Step 4: Compare Forward P/E with Benchmarks

TSLA stock is one of the most expensive, if not the most expensive, large-cap stocks in the US. Not only does it trade at least 2-3 times more expensively than most broad indexes, but it is also not expected to grow more than the S&P500 index for the next 3-5 years. TSLA is expected to grow on average 15% annually for the next 3-5 years, while the same expectation for the S&P500 is 14.10%. Yes, TSLA’s valuation is very, very rich.

Step 5: Insider & Institutional Ownership <70%

Our current hurdle for the average ownership rate is 70%. According to finviz.com, for TSLA, that rate is 59%. Most institutional investors do not overweigh the stock—it is a darling of retail investors.

Step 6: Avoid High Short Float (>5%)

The average stock in the S&P500 has a short float of around 1% of shares outstanding. TSLA has always been more heavily shorted, but current levels of short float are pretty low. That is very good—once a trade becomes very popular, the odds of winning decrease. Another reminder of GME, where the meteoric rise in price in 2021 was primarily driven by short covering—at the beginning of 2021, the short float of GME was nearly 100%.

Practically every share of the company was borrowed and sold short, which is a very dangerous scenario. The 2.79% short float in TSLA is near the bottom of its 2-year short float range—between 2.5% and 4.0%. This is an excellent indication that shorting TSLA is not popular with investors right now, and hence, it could produce above-average returns.

Step 7: Implied Volatility Near Long-Term Average

30-day Implied Volatility should be near its long-term average or below. According to data from alphaquery.com, the chart above illustrates TSLA’s 30-day implied volatility history. Based on this, options market makers appear to believe that TSLA’s recent price movement has stabilized.

The 30-day implied volatility for the stock is at 60.35% annually or roughly 3.8% daily moves; a very normal level for us will be between 55% and 60%. We can not overstate the importance of this step. Implied volatility levels are very important when predicting a stock run’s end. Shorting is not for the faint-hearted. We need practically all steps to give us the green light to short a stock. 30-day implied volatility range is one of the most important steps.

Step 8: Evaluate Performance vs. Sector Peers

This is done to ensure no significant inflow into the sector. Sometimes, a stock can become more expensive just because the valuations in the sector are expanding.

It is hard to believe, but TSLA, a 1 trillion USD company, has been up 30% since election day, while competitors like RIVN and BYDDY are roughly unchanged. The truth is that the theory you learned in school—that markets are efficient—is not correct. Markets are efficient in the long run, but in the short term, like a week or a month, what moves the markets are usually innuendos, gossip, projections, and sometimes sheer paranoia and delusions.
Mr. Elon Musk has endorsed President Trump, and the market has interpreted that support as benefiting TSLA.

In fact, Mr. Trump has stated that he will end the tax credits for new EV purchases. Clearly, the Trump administration can be helpful to TSLA in many ways. However, this is far from certain, and even if there is a benefit, will it be that large? This is 300 billion USD worth of benefits if we believe the market value has increased since the election date.

And if there are benefits to the industry, why aren’t rivals also going up? The market seems to imply that TSLA will be the single EV manufacturer in the US to benefit from the Trump administration. In our opinion, this is unlikely to be the case. We deem the current price levels of TSLA to be an attractive shorting opportunity.