Nvidia Shorts Made a Killing on the DeepSeek Drop. It May Not Last.
Jan 28, 2025, 2:00 pm EST
Investors who bet against Nvidia on Monday made a killing, but shorting
the stock may now be tougher, making it costlier to bet against the AI chip
giant.
The stock, along with Broadcom, another chip company hit hard in Monday’s
DeepSeek selloff, was restricted from short-selling on the Interactive Brokers platform Tuesday morning after
triggering a Securities and Exchange Commission circuit breaker known as the
“uptick rule.”
That rule can
put the brakes on shorting a stock after shares decline more than 10% from
their previous close. It can come into effect as a kind of circuit breaker to
prevent hedge funds and other traders from ganging up on a stock, essentially
requiring short-sellers to wait in line behind traders seeking to sell their
shares.
It’s unclear if the pause was widespread. Shares appeared
available for shorting on the Fidelity platform on Tuesday, for instance. JJ
Kinahan, CEO of IG North America, which owns the tastytrade online brokerage,
said it was not restricting short sales of Nvidia Tuesday. The Nasdaq exchange,
where Nvidia is listed, told Barron’s it was looking into the
matter.
Shares rebounded Tuesday, gaining nearly 9%. Steve Sosnick,
chief strategist with Interactive Brokers , told Barron’s that
the uptick rule would last the rest of Tuesday. And since the stock didn’t
suffer another 10% drop, short sellers won’t have to wait in line come
Wednesday.
Betting against Nvidia has been an awful trade for short
sellers. But it was terrific on Monday. The stock’s 17% plunge led to a one-day
profit of $6.56 billion for Nvidia shorts, according to research from S3
Partners. Nvidia shorts were up nearly 11% for the year on this trade before
Tuesday’s comeback. Shares are now down just 4% this year.
Investors who bought leveraged single stock exchange-traded
funds in Nvidia—which amplify their short or long positions in a company
through the use of financial derivatives and debt—made an even bigger profit
Monday.
The Tradr 1.5X Short NVDA Daily ETF and GraniteShares 2x Short NVDA Daily ETF surged 25% and
34% respectively Monday as Nvidia’s stock tanked. Both ETFs fell Tuesday as
Nvidia’s stock bounced back.
Short sellers bet against stocks by borrowing shares and
selling them, hoping to profit from buying back the stock at a lower price and
pocketing the difference when returning the shares. If the stock price keeps
climbing, short sellers could lose their shirts since they eventually have to
repurchase the stock at a higher price than what they sold it at.
Monday’s gains from the selloff still pale in comparison to
the massive amount of money lost by traders shorting Nvidia, according to Ihor
Dusaniwsky, managing director of predictive analytics for S3 Partners.
The stock has been one of the market’s best performers for
the past few years thanks to demand for its AI chips. Nvidia soared more than
170% last year, for example. As a result, Dusaniwsky said Nvidia shorts lost
$24.24 billion in 2024, a decline of 81.3%.
Only about 1.2% of Nvidia’s total float was being held short
as of Monday, Dusaniwsky said, a sign the market is almost uniformly lined up
in support of the stock.
Whether short interest will start to creep up is an open
question as Nvidia becomes more of a battleground stock.
Dusaniwsky expects the shorts to be kept at bay, even though
it’s among the cheaper stocks to borrow. He said that since Nvidia is
considered “general collateral” because it is liquid and easy to borrow, the
borrowing fee for Nvidia is just 0.3%, compared to an average borrowing fee of
0.45% for U.S. stocks.
While Monday’s plunge “helped settle the nerves of the more
jumpy NVDA short sellers and helped them recoup a sliver of their 2024
mark-to-market losses, the move should not lure a large new cadre of short
sellers since most NVDA short sellers are already in the trade,” Dusaniwsky
said in an email. He added that if Nvidia continues to drop, shorts may add to
their exposure, “but its volatility and upward stock price bias will limit
surges in short selling.”
Short sellers overall tend to be more wary of megacap stocks
because they are more widely followed by analysts who tend to be bullish and
have support from big institutional investors, including index funds and
actively managed accounts.
Melissa Roberts, an analyst with Stephens, said in a report
Tuesday that short interest for the broader market was just 1.9% of total
shares as of mid-January. Meanwhile, short interest in small and mid-cap stocks
accounted for 6% of the market, up slightly from the end of December.
Others aren’t so sure the shorts will now stay away from
Nvidia. The emergence of potentially cheaper AI technology from DeepSeek and
other Chinese companies may have changed the equation for Nvidia and other
companies that got a big bump in 2024 due to AI hype.
Armando Gonzalez, CEO of RavenPack, a financial data
provider for hedge funds and asset managers, said in an interview with Barron’s that
the Nvidia selloff was a “good wake-up call around the real value of large
language models” and that there is now a “risk of [AI technology] becoming more
commoditized.”
Investors betting against the AI leader probably should
still tread cautiously. Nvidia is still the king of AI and that likely won’t
change overnight.
Write to Paul R. La Monica at paul.lamonica@barrons.com
