Elon Musk vs. the short sellers: "I am trying to warn them and they are not listening"

An increasing number of investors are betting against Elon Musk's SpaceX stock, selling it short in unprecedented volumes — and this is despite repeated warnings from Musk himself on the X network that this bet is dangerous.

So far, they have been right and have profited: the stock has plummeted about 50% from its peak, and the short sellers were sitting on a paper profit of about $15.5 billion at the end of July. But as the bet grows, so does the opposite risk — that if the stock suddenly surges, everyone will rush to cover their positions at once and ignite an even more violent jump, a scenario known as a "short squeeze."

The data tells a story of a bet that is inflating rapidly. The amount of shares shorted on SpaceX jumped from 23.34 million in mid-June to 165.05 million in mid-July — a 7-fold increase in one month.

Analytics firm Ortex, which tracks changes in real-time, measured an even sharper rise towards the end of July: about 360 million shares shorted, which are about 56% of the actual tradable shares. S3 Partners reported simultaneously that about 95% of the shares available to borrow have already been borrowed.

Relative to all SpaceX shares (7.57 billion), the short looks negligible — only about 1.25%. But SpaceX issued only a small slice of shares in the IPO, so the actual tradable supply is very small. When measuring the short against this supply, it is huge. And that is exactly what makes the situation explosive: a lot of short positions crowded into very few tradable shares.

How does a short work? A short seller borrows shares, sells them immediately on the market, and hopes to buy them back cheaper later and profit from the difference. When a stock falls, it is a profitable trade — and SpaceX provided exactly that. The stock fell from a peak of $225.64 after the IPO to below the IPO price of $135, and then plunged another 13% after the first financial report.

Peter Hillerberg, co-founder of Ortex, said that "there is no sign that the short sellers are taking profits in SpaceX. If anything, they are increasing their bets."

Musk did not remain indifferent. In response to a post pointing out the growing bet against his company, he wrote:

"I am trying to warn them, but they are just increasing the bet."

In a separate post earlier, he phrased it more sharply: "The survival probability of companies holding a significant short position in SpaceX over time is very low." Musk has seen this movie before with Tesla, but in the meantime, the short sellers continue to increase exposure and not retreat.

The risk of a short is fundamentally different from a regular purchase. When buying a stock, the maximum loss is limited to the amount invested, because the price cannot go below zero. In a short, however, the loss is theoretically unlimited — because there is no ceiling to how high a stock can go. And if a leveraged shorted stock suddenly surges, the short sellers are forced to buy it back to cut losses, and this buying pushes the price even higher, creating a self-feeding wave.

At SpaceX, the scale makes this scenario particularly acute. Ortex estimated that every one-dollar move in the stock is worth more than $300 million to the short side. And even after the post-report plunge, SpaceX became the most bought stock among retail investors according to Vanda Research — buying from this side could add fuel to any sudden jump.

Short sellers have been right so far, and the stock could still continue to fall — which would make the bet against it even more profitable. On the other hand, it could reverse sharply, or simply move wildly between both directions.

Since SpaceX entered the Nasdaq 100 index, many pension and training funds hold it automatically. Even if its weight is small, the war between the short sellers and the stock's supporters translates into volatility — and this volatility trickles down, even if only slightly, into your passive savings.