On August 7th, 2018, Elon Musk claimed on Twitter that he had secured funding to take...

On August 7th, 2018, Elon Musk claimed on Twitter that he had secured funding to take Tesla private. On that day, Tesla stock price jumped up from $342 to $380 per share. Why did the financial market react positively to that news? What happened to the short sellers of Tesla stocks during that time? Recall that Musk is the founder of Tesla and was involved with the corporation’s day-to-day operations.

Expert Solution

When the Elon musk announced that he had secured funding to take Tesla private, the share price jumped because the market participants estimated that they would get to sell their shares at a higher price because must also said that he will take Tesla private at a price of $420 which was not directly quoted, but it was indirectly interpreted by the market.

There were a lot of shorts into the system because the Tesla was estimated to perform poorly, and those short sellers got trapped bad as they had to sell their shares at any price to unwind their position because this news has completely changed the scenario because taking the company private would have meant that there would be very less float in the market till the company was going private as most of the investors saw an opportunity to sell their shares at Higher price.

the short sellers got trapped bad and the lost miserably due to short squeeze in the system and since Elon Musk is the founder of Tesla, his confirmation on Twitter was a thing to trust so the market reacted intense on that Twitter announcement.

jeff jeffy answered 1 year ago

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