What is a Short Squeeze?

What is a Short Squeeze and how can you profit from it?

An epic Short Squeeze can occur when you have more than 50% of the overall shares owned by Short Sellers. A Short Seller’s expectation is that a stock will continue going down in price. When too many short sellers pile into a stock, it becomes very difficult to cover for a profit if there’s a mass exodus.

When a positive press release, news event or earnings report comes out, it may rocket the share price to new weekly, monthly, yearly or all-time highs. As a stock that’s heavily shorted hits a new high in price, odds are, every person who’s short is underwater and looking for an exit if the stock continues higher.

Heading into last week there was a news story out that John McAfee purchased a stake in MGT Capital Investments Inc – $MGT. The stock went from around $0.25 a share to around $1.70 at the end of the trading day on Friday 5/13/2016.

Before the Short Squeeze

On Friday 5/13/2016, $MGT was at a new yearly high. All of the short sellers were underwater and losing money. Normally when a stock jumps up to a new monthly or yearly high, it generally comes back to earth in an orderly fashion.

What set $MGT apart from a standard stock hitting new highs was a terrific news story and the fact that over 50% of the share holders were short. I posted this on Stock Twits over the weekend heading into Monday.

During the Short Squeeze

Monday 5/16/2016 the stock gapped up and began squeezing out Day Traders and Swing Traders who recently shorted the stock. On Tuesday 5/17/2016 the stock gapped up again and squeezed out even more Short Sellers.

I discovered $MGT was heavily shorted by using shortvolume.com before the squeeze that started on 5/16/2016. I also use shortstockvolume.com.

As shown above, I was easily able to see that $MGT’s float was about 51% short. More than half of the people who owned the stock were in jeopardy of getting squeezed if the stock gapped up at the open on Monday 5/16/2016. As shown in the image below, you can see that a good portion of the Short Sellers who owned this stock were in fact squeezed!

Let’s not get too crazy and think that a wild runner like this is going to squeeze out everyone. By the end of the trading day 5/16/2016, the short interest fell to just 46.71%.

After the Short Squeeze

The traders who held onto this stock throughout the storm know that its a bad company and going back down at some point. I included this part so everyone knows not to get too carried away. In the end, $MGT got up to about $5.00 which is a 2000% gain. Even with a 2000% gain the short interest fell off, but not entirely.

The following chart shows why the Short Sellers remained bearish.

Not all strong gap ups result in a Short Squeeze. A stock needs to have 4 things in order for an epic Short Squeeze to really take flight.

Great News Story / Catalyst
Stock trading at new highs
50% or higher Float owned by Short Sellers.
Trading Sentiment / No Other Runners

When all of the above criteria is met, the odds of a Short Squeeze taking flight greatly increase. Of all the items listed above, the catalyst is the most important in my opinion. The more coverage a stock receives the more eyes will be watching it. In the case of $MGT, John McAfee is well known for creating the McAfee antivirus software and being wanted for murder.

When celebrities and well-known business owners get involved with a stock, the price can sometimes make wild moves. Remember when Oprah purchased Weight Watchers? $WTW went from $7.00 to $28.00 on the news alone.

What is a Short Squeeze?

In the future when you see a stock that’s up on a great news story and beginning to make a new high, check the short interest to see how much of the float is short. If the news story has legs and the float is heavily shorted, you may have just found a stock that’s about to rocket off to new highs and squeeze out some of the short sellers along the way.

When Short Sellers start getting squeezed, it can make for some rapid moves in price. Share your Short Squeeze candidates like $MGT with others at the Day Trade Chat Room. Please share your comments below.

 

JC Trades

Day Trading stocks since 2014, he documented his first 100 Day Trades at http://jctrades.com.

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