A short squeeze takes place when a stock that is heavily shorted comes out with some positive news, or even just starts moving upwards do to a rising market, and the short sellers scramble to cover their positions, driving the price of the stock up sharply.
One sector that has a lot of volatility and can cause quick moves is technology, and if a short squeeze takes place, the gains can be substantial, especially if the stock has already dropped.
For example, Castlight Health (CSLT), which is in the business of cloud-based health care management software, has short interest of 63%, which means that almost two thirds of the shares of the company are shorted. This New York Stock Exchange traded company has a float of only 12 million shares. Although the company currently isn't generating earnings, revenues for the latest quarter were up 353%. The company is debt free.
NQ Mobile (NQ) is another stock that is heavily shorted. The company is involved in mobile security and privacy Internet services. The stock traded above 20 back in March and is now down to around 6.50 a share. About 55% of the shares are shorted.
Ebix (EBIX) has a short interest of 48.5%. This provider of software for the insurance industry trades at ten times earnings and even pays a dividend of 2.4%. Last year, the stock traded above 24 per share; now it's down to slightly above 15. This stock has a short interest ratio, also known as the days t cover ratio, of 30.6, which means it would take over 30 days for the short sellers to cover their positions, based on the stocks average daily trading volume.
Remember, the short seller can be caught short, and this is a way to the investor or trader to take advantage of them.
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Disclosure: Author didn't own any of the above at the time the article was written.