How To Profit From The Short Squeeze Trading Stocks

On November 8th, 2016, The US Presidential Elections were held. Early the next day, it was announced that Donald Trump was the winner. The following day, we saw a number of sectors trade significantly higher (and some lower), based on what investors trading stocks thought it would benefit/suffer under the new President-elect.

Clearly, an event of this magnitude is not a one-off. A shift in policy changes will have a longer term effect on certain stocks. With that said, some sectors that shined that following day were in the infrastructure, pharmaceutical, and banking space. It was believed that the President-elect would cause an inflationary effect to the markets.

One company that was believed to have benefited from this regime change was Top Ships Incorporated (TOPS), it closed the week up more than 30%, largely off the election results. However, the stock had some other interesting information pertaining to it. A large percentage of the shares were sold short and still not covered by those trading stocks.

In other words, investors borrowed shares from their broker to sell, in hopes that prices drop so they could buy them at a lower price and cover. In this case, we had a situation where the stock reacted to positive news, in addition; traders, who were short the stock, were causing more pressure because they were buying shares to cover their short.

These two factors can cause a stock price to rise dramatically.

short squeeze

(chart: www.TradingView.com)

In this example, the stock price went from about two bucks to as high as $3.50 in just a matter of days.

If you’re a trader trading stocks, how can you use this information?

Well, let’s you traded mean reversion, and saw that the price of a stock normally trades in a $.50 range, and today for whatever reason it’s up $4. Without any other consideration, you decide to short and it ends up not working in your favor. Now, if you looked at the short interest of the stock, and noticed that it was relatively high, maybe you would have laid off on the short idea.

On the other hand, if you’re taking a long position, it might make more sense to size these trades smaller and play for a larger than normal move. A short interest stock combined with a positive catalyst can really send the stock price flying. Just being aware and be help in and of itself.

Is this information readily available when trading stocks?

The answer is yes, and for the most part, you can find a lot of it for free.

For example, if you hop on over to finviz.com, you can find important information like shares outstanding, shares float, and short float %.

trading stocks

(source: finviz.com)

In this case, Top Ships had a short float ratio of 16.92%. However, it’s best to use more than one source. For example:

good stocks to buy

According to YAHOO! Finance, the short interest % on this company is 36.14%.

In a situation like this, where the two sources have a wide margin, check out another source.

hot stock picks

 

(source: gurufocus.com)

Being aware of a potential short squeeze can make you a lot of money or even save you a lot of money. The key is to be ready and prepared when trading stocks.

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