How to Make Money Buying Short Squeeze Stocks

One technique that many traders use is buying short squeeze stocks. So what is a short squeeze stock and what is a short squeeze? First, for those of you who aren't aware, I will cover shorting stocks real briefly.

When you short a stock, it means that you hope to make money from a drop in the price of a stock. Technically what happens is that you borrow shares of a stock, sell those shares, then buy back those shares at a hopefully lower price so that those shares can be returned. Of course, this all happens electronically, you don't actually see all the borrowing and returning of shares; it just shows up on your computer screen as a negative number of shares.

Short sellers can make a lot of money, but sometimes when the stock moves against them, the stock starts to move up, and the short sellers scramble to buy shares to cover their position. This is called a  short squeeze. When a short squeeze takes place, it can cause the stock to rise fast and hard. Plus, any bit of good news can trigger the short squeeze.

So other traders take advantage of this situation buy looking for stocks that may have a potential short squeeze. Here is what they look for:

• Short Percentage of Float ~ The float is the number of freely tradable shares and the short percentage is the number of shares held short divided by the float. Amounts over 10% to 20% are considered high, and potential short squeeze plays. 
• Short Ratio / Days to Cover / Short Interest Ratio -This is probably the most important metric when looking for short squeeze trades, no matter what you call it. This is the number of days it would take the short sellers to cover their position based on the average daily volume of shares traded. This is a significant ratio as it shows how "stuck" the short sellers are when they want to buy in their shares without driving up the price too much. Unfortunately for the shortsellers, the longer the number of days to cover, the bigger and longer the squeeze.
• Short Percentage Increase ~ This is the percentage increase in in the number of short sellers from the previous month.

Now, what stocks are looking good for a short squeeze play? Let's look at Jakks Pacific (JAKK), the toy company, as an example. Almost 70% of the stock's float is held short. That's a huge amount.

In addition, the stock has a short ratio of 19.2, which means it would take almost 20 days for the short sellers to cover their positions, based on the average daily volume.

Earnings for the latest reported quarter jumped 16% on a revenue rise of 12.4%. The company will be reporting the earnings again sometime between February 24 to March 2. At 6.46 per share, the stock is already down by over 43% from from its high over the last twelve months, when it traded at 9.16 a share back in April.

It will be interesting to see how the holiday sales figures and earnings were during the fourth quarter. If you are looking for other stock ideas, check out the stock lists at WallStreetNewsNetwork.com.

Disclosure: Author didn't own any of the above at the time the article was written.

By Stockerblog.com