I keep thinking HN is not the place for this sort of nonsense but then maybe I'm the one in the wrong. Certainly most discussions about Musk here are not based on any kind of rational analysis of the facts. Yours is the popular position, if a bit wearisome.
You misunderstand. The calculation is not about a single lawsuit costing billions. It's about potential damages from ALL possible lawsuits from pissed off short-sellers. And that's not absurd at all - it's a real possibility, since Tesla stock is one of the most popular on the stock market.
What happens if you bought calls for a price higher than $420? They are worthless. You don't have to be a short-seller to have been burned by this.
To be fair, they always were worthless at best, the company would be bought at $420 (and no higher).
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I think you mean "bought calls at strike price $400" (leaving ~$20 buffer before the presumed buyout price). If Tesla were bought at $420, then calls at strike $400 would be worth $20 each.
Of course, as the $420 buyout price is falling apart, a call@400 is looking pretty worthless right now.