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You need a lot of money – and courage – to sell short Trump Media stock at the moment.
Trump Media, which began trading last week, is now by far the most expensive U.S. stock to sell short, according to S3 Partners, a leading financial data marketplace.
But many people are still willing to pay those high costs, convinced that Trump Media’s stock price is destined to fall dramatically from its Wednesday close of $48.81.
Investors who wanted to borrow Trump Media stock to sell short on Wednesday would have had to pay annual financing fees of between 750% and 900% of the stock price, said Ihor Dusaniwsky, managing director of predictive analytics. at S3 Partners.
That means a short seller of the DJT ticker who took a position Wednesday would have had to pay fees of between about $1 and $1.22 per day to lenders.
To break even on a new trade after a month, a short seller would need to see Trump Media’s stock price fall by more than $30.
That could be a difficult position, given that many of Trump Media’s shareholders are individual investors motivated to buy the stock by their support for former President Donald Trump, the company’s majority shareholder and most high-profile users of its Truth Social app. .
Investors who started shorting Trump Media earlier than Wednesday pay fewer fees, which are collected at the end of each month, Dusaniwsky noted. But not that much.
As of Wednesday, existing short positions in Trump Media were yielding annual costs of 565%, he said.
For comparison, the average funding cost of borrowing shares for a short position was only 0.71%.
“It’s the most expensive stock loan,” Dusaniwsky said of Trump Media. “Every day the stock has to go down 78 cents just to offset the financing costs, just to get you back to zero.”
“People are expecting an extraordinary drop in prices in an extremely short period of time,” he said. “If you plan to hold your shares for a month, the shares need to fall by more than half for it to be profitable.”
Dusaniwsky called the financial costs of Trump Media’s short sales “extraordinarily rare.”
“This is a ‘black swan’ event,” he said. “As a legitimate business, it’s really way off the curve.”
The second most expensive stock to sell on Wednesday was Canopy Growth, whose short sellers were charged annual costs equivalent to 198% of the stock price, according to data from S3 Partners.
Short sellers of Beyond Meat, the third most expensive stock by short selling costs, reportedly paid 79% annually.
Short sellers are actually betting that the price of a stock will fall below the price at which they borrowed the shares that they then sold. If the price falls, they can buy shares to return to lenders, pocketing the price difference.
But if the stock price rises, they may find themselves in the uncomfortable position of having to buy stock and lose money on the trader or increase the collateral they provided to secure the trade – a “short squeeze”. discovered.”
As of Wednesday, short interest in Trump Media — or the value of shares borrowed for short trades — stood at about $255 million.
Despite the high cost of shorting Trump Media, many investors are interested in doing so, attracted by the fact that the stock price gives it a market cap of $6.6 billion, despite a figure of business of just $4.1 million last year.
“What I hear on the street is that if (a quantity of) shares become available, short selling drives them down,” Dusaniwsky said.
When Trump Media went public last week following a merger with a shell company, its price soared more than 50% in the first minutes of trading, reaching a high of 79.38 per share.
But on Monday, the stock price plunged 21% after Trump Media announced it had lost $58 million in 2023.
Dusaniwsky said Trump Media short sellers are engaging in these trades because “they think this stock is overbought” and there is a real opportunity to make money from a dramatic price decline.
These sellers “are hoping to make a return of more than 20% on this transaction,” meaning the stock price would have to fall as much as 70% to cover the financing costs of the transaction, he said .
Investors who can borrow shares from their brokers for a Trump Media short sale are “good customers” of those brokers, he said.
“When stock borrowing becomes this difficult, only the best clients benefit,” he said. And the best clients are those who have stock reserves or other collateral to cover their positions, he added.
But it’s increasingly difficult to borrow stocks to sell them short. Of about 5 million Trump Media shares available for sale, 4.94 million have already been borrowed, driving up financing costs.
“It is now a squeeze stock because the shorts are losing money, the interest rates are very high and there is also a call risk,” Dusaniwsky said, referring to a situation in which a broker must obtain shares from a short seller in order to sell them. a long position client who initially purchased the shares on margin.
Dusaniwsky said short sellers are in a difficult position because many Trump Media shareholders are not in the mood to sell their shares, driving the price down, and because there are so few shares to borrow and sell short.
– Additional reporting from CNBC Nick Wells
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