The impact of Tesla on the US stock market is greater than you think!

Elon Musk's successful "bet" on Trump has completely boosted Tesla's stock price.

Since the election on November 5, Tesla's stock price has risen nearly 30%, adding over $200 billion to its market value. As of Monday's close, the company's valuation has rebounded to $1.1 trillion, just a step away from returning to its historical peak.

Against this backdrop, hedge funds that previously shorted Tesla have begun to reverse their positions. In the days since Trump secured victory, the frenzied buying of Tesla call options has triggered a typical "gamma squeeze." A "gamma squeeze" usually occurs when investors buy a large number of call options, prompting short sellers to buy the underlying stock to hedge their risks, which in turn drives up the stock price.

Moreover, the scale of Tesla options trading is "huge," according to Asym 500 analyst Rocky Fishman. On Monday, the Financial Times cited data provided by Fishman, reporting that since the election, the notional trading value of Tesla options has averaged $145 billion per day. Last Friday, the notional trading volume reached an astonishing $245 billion. In contrast, the second most active single-stock options market, Nvidia, has a daily trading volume of $55 billion, while the total trading volume of other U.S. single-stock markets is $310 billion.

This scene inevitably brings back memories of 2021, when the "Tesla-Financial Complex" also stirred up a storm in the U.S. stock options market.

The "Tesla-Financial Complex" refers to the enormous impact that Tesla and its related financial activities have on the U.S. stock market, far exceeding the influence on Tesla's own stock. This complex includes various investment tools reliant on Tesla, companies mimicking Tesla's business model, and the derivatives market related to Tesla's stock, especially the options market.

The "Tesla-Financial Complex" Revives

Some believe that when the force of the "Tesla-Financial Complex" strikes, investors from passive index funds, traditional mutual funds, hedge funds, and even ordinary retail investors have no choice but to face it.

"It’s like a prominent thumb," said Dean Curnutt, CEO of MacroRisk Advisors, during the surge in Tesla's stock price in 2021, "This is something you have to pay very close attention to."

One notable feature of Tesla's stock is that one of the driving forces behind its soaring market value is indeed options trading. Although Tesla's stock is very popular among ordinary retail investors, the sheer scale and activity level of Tesla options have surprised many seasoned market professionals. Options, as a popular derivative contract, allow investors to bet on a stock's upward or downward movement, amplifying potential gains or lossesOrdinary retail investors have always been the backbone of the Tesla options frenzy, but some of them have more resources to make larger leveraged bets on Tesla, such as Chinese billionaire Liao Kaiyuan, who has accumulated a significant stake in Tesla largely through actively purchasing call options.

Tesla's fame and stock volatility have also begun to make it a component of structured investment products like automatic redemption, further linking its stock to the fate of the broader financial ecosystem.

Automatic redemption is a complex savings tool, particularly favored by Asian investors, who construct bond-like fixed returns by selling stock options, historically mostly options on large indices like the S&P 500, Hang Seng Index, or Nikkei Index; in recent years, some investors have started to include options on more volatile individual stocks in their portfolios, with Tesla having long been one of the popular choices.

"This is because Tesla is large and technologically advanced, so it is seen as a safe investment, but (for investors) investing in structured products is very profitable because of its high volatility," said Michael Green, Chief Strategist at asset management firm Simple Asset Management.

Is Tesla the "tail wagging the dog" of the U.S. stock market?

As Tesla's stock price returns to its disruptive era, those who short Tesla are always particularly pained. Earlier data from S3 Partners showed that from U.S. Election Day (November 5) to last Friday's close, hedge funds that shorted Tesla have lost at least $5.2 billion on paper.

As the situation changes dramatically, hedge funds that previously shorted are withdrawing their short positions. Data from Hazeltree shows that over the past four months, many hedge funds have successively closed their short positions on Tesla, a move that coincides with Musk's public support for Trump on July 13. As of November 6, only 7% of hedge funds were net short on Tesla, down from 17% in early July.

As Drew Dickson, Chief Investment Officer at Albert Bridge Capital, said in 2021, investors underweighting Tesla have certainly been punished.

Dickson stated at the time, "Tesla has been a significant factor in the poor performance of many portfolios. You have to wonder if many of them are now holding it just out of fear of falling behind."

"Nowadays, many assets have enormous, cyclical 'tail wagging the dog' characteristics (in the stock market, the tail wagging the dog phenomenon refers to a small number of stocks or trading activities having a significant impact on the overall market trend)," Dickson said, "I firmly believe that ultimately, fundamentals will prevail.""But in the past few years, I have seen short-term and medium-term more dominated by liquidity, momentum, memes, and desire."

He recalled the saying of Wall Street father Benjamin Graham, that the stock market is a voting machine in the short term and a weighing machine in the long term. "In the current environment, I believe we are spending more time on voting," Dickson said