Shares of Mullen Automotive (NASDAQ:MULN) spiked 25% on Friday morning after the firm filed an SEC form announcing a new battery partnership. The “HUGE” battery advancement news was previously reported in a company press release.

Short sellers would immediately sense an opportunity. According to data from Fintel.io, the number of shares available to sell short dropped from 3.7 million on Thursday to 0 the following morning.

But speculators would be wrong to short MULN stock. Despite the EV startup’s issues, the firm’s low and volatile share price makes it unattractive to short-sell. And unless you want to blow up a margin account, it’s best to stay far away from this EV moonshot.

MULN Stock: Blowing Up Margin Accounts Since 2021

Mullen Automotive began trading on the Nasdaq in November 2021 after merging with payments-as-a-service shell company Net Element.

Shares would immediately begin a wild ride. On Nov. 11, shares rose 25%, only to fall 35% over the next seven trading days. Investors seeking price action would have found plenty of it.

Since then, things have only gotten wilder. There have been 55 days where shares rose at least by a quarter, and 35 days where they fell by that amount. The firm has now notched three instances where shares more than doubled within two trading days.

To a short-selling investor, such volatility is exceptionally unappealing. FINRA Rule 4210 requires at least 20% of maintenance margin for any stock sold short. And many brokerages will default to a 30% rate for volatile stocks like Mullen.

That means an investor with an initial $1,000 of equity who sells $1,000 of MULN stock short could receive a margin call before Mullen rises 80%. In the 30% maintenance margin case, shares only need to go up 70% to force a sale, regardless of the price. That locks in losses for short sellers.

These margin calls also fail to protect investors from further losses. In the example above, a forced liquidation when shares rise 70% still leaves the investor with $400 of shorted securities, assuming the brokerage reset margin requirements to the initial Regulation T levels of 150% equity. That’s $300 of remaining equity plus $300 of short proceeds, all divided by 150%.

In other words, margin calls protect the exchange, not the investor.

Short selling also has an unfortunate property where losses grow more significant the higher a stock goes. In the previous example, the initial $1,000 MULN shares would lose 1% of their equity for every 1% rise in Mullen’s stock. But if shares rise 50%, an additional 1% gain turns into a $10 loss on $500 of remaining equity, or a 2% loss. A 70% rise in the underlying security turns another 1% increase into a 3.33% equity loss, and so on. The losses grow infinitely large as the equity portion approaches zero.

The only silver lining is that its short borrow fee rate is less than 10%.

The Trouble with Mullen

That’s not to say that Mullen Automotive is a stock to buy.

I’ve long written about issues at the electric vehicle startup, ranging from its ailing balance sheet to its weak corporate governance structure. The company has diluted common shareholders by roughly 98.8% since 2021, while awarding CEO David Michery a $36.1 million pay package and anti-dilutive shares.

The firm has also struggled to bring production-ready cars to market, despite owning a facility that can produce up to 50,000 vehicles per year. The firm has taken to allegedly reselling Chinese cars in Europe. And in its latest salvo, Mullen’s legal team has begun suing publications for painting the firm in a negative light. Mullen’s innovations are more about finding new ways to fundraise from stockholders and strategic investors. In its latest quarterly filing, it now reports at least four different share classes and $84.8 million of warrant liabilities outstanding.

Mr. Michery’s latest deal will also raise eyebrows. His new business partner, Lawrence Hardge, plead guilty in 2001 to violating securities laws. He was also indicted on two felony counts of bad checks. And although Mullen’s press release assures investors that Mr. Hardge’s criminal record was ultimately expunged, such flags should put investors on alert. The “Battery Life Enhancing Technology” and “Ever-Charge Technology and/or Energy Management Module” must prove their worth.

How to Short MULN Stock

Options markets currently value Mullen’s shares at around 50 cents for January 2024. It’s an unflattering image for a stock that once traded well over $10.

Still, these valuations open one possibility for risk-seeking investors:

They could sell the underlying stock and buy long-dated 50-cent call options as insurance in case prices skyrocket. These options can be bought for 5 cents or less today.

There are, of course, several practical issues with this approach. Firstly, investors will need to wait until short shares are available again. By then, it’s unclear where prices will be. Second, the implied volatility for MULN’s options are relatively high; investors holding on will suffer “theta decay” if they hold on too long. And finally, investors need to be prepared for sleepless nights when the underlying security rises 100% or more in less than 24 hours, but options prices don’t follow suit.

That’s why I’m recommending investors avoid shorting this electric vehicle innovator. Even if Mullen’s latest acquisition fails to pan out, the risk-adjusted gains aren’t… well… worth the risk.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.