Short sellers often profit from this technique, but occasionally when the stock moves against them, the stock rises, and the short sellers rush to buy back shares to cover their position, creating what is referred to as a short squeeze. When this happens, the stock can increase in value very quickly. Positive news can cause the short squeeze to take place.
Stock traders profit from this situation by finding stocks that could 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 -A very important metric. 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 the number of short sellers from the previous month.
GoPro (GPRO), the sports camera company, is a heavily shorted stock, with over 60% of the stock's float currently held short.
Pilgrims Pride Corporation (PPC) is also heavily shorted, with 58% of the float held short. In addition, the Short Interest Ratio is 19.7. This means that the approximate number of days to cover the position is 20 days, based on the current daily volume.
ITT Educational Services (ESI) has a short interest of 47%, and a days to cover ratio of 31.9. GameStop (GME) has 44% of the float shorted, with a short interest ratio of 42.3.
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.