Category: Shorting

Top Short Squeeze Stocks Might Be Worth Buying

by Fred Fuld III

The cannabis company Tilray (TLRY) jumped from 22.93 a share to around 300 a share from the beginning of August to late September. This is in spite of the fact that the company hasn’t generated any earnings. Many believe that the reason for the price rise in the stock is due to a short squeeze. When the stock rises fast for any reason, short sellers scramble to cover their positions by buying the stock, and thereby driving up the price of the stock even more.

So how can you make money on the long side from short squeezes? One technique that stock traders utilize is buying short squeeze stocks, companies have been heavily shorted. Here is a more extensive explanation of what a short squeeze is.

When you short a stock, it means that your goal is 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. This all happens electronically, so you don’t actually see all the borrowing and returning of shares; it just shows up on your screen as a negative number of shares.

Short sellers can be profitable, but sometimes when the stock moves against them, and begins to rise, the short sellers jump in right away to buy shares to cover their positions, creating what is called a short squeeze. When a short squeeze takes place, it can cause the share prices to increase fast and furiously. Any good news can trigger the short squeeze.

Some traders utilize this situation by looking for stocks to buy that may have a potential short squeeze. Here is what a short squeeze trader should take into consideration:

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.

Here is one example. Big Lots (BIG) is a stock that is heavily shorted. As a matter fo fact, 25.2% of the float is shorted. In addition, the number of shares shorted has increased by 1% over the last reported two week period. Finally, the short interest ratio is 11.5. That means it would take the short sellers over eleven days to cover their positions, based on the number of shares that trade each day on average.

So what stocks are heavily shorted that may be worth a closer examination? Check out the following list, but be aware, that often some stocks are heavily shorted for a reason. All these stocks have price for earnings ratios and forward P/E ratios of less than 15, and a price sales ratio of less than one.

Hopefully, some of these stocks will squeeze some juice out of your portfolio.

Company Symbol % change % of Float Days to cover
Bed Bath & Beyond BBBY -5% 21.6% 2.5
Big Lots BIG 1% 25.2% 11.5
Cooper Tire & Rubber CTB 4% 20.1% 20.2
Camping World Holdings CWH -1% 48.9% 6.1
Dillards DDS 2% 43.3% 21.7
Dicks Sporting Goods DKS -4% 20.7% 6.1

Why Shorting Puts May Be the Safest Way to Invest or Trade Stocks

by Fred Fuld III

Did you know that one of the safest ways to invest in a stock or trade a stock is to short a put? But wait a minute, you may ask. Doesn’t shorting mean unlimited risk? Yes, if you short a stock, no if you short a put.

Let’s get some terminology out of the way.

When you short something, you sell it even though you don’t own it, hoping that it will drop in price so that you can buy it back at that lower level to lock in your profit. However, if the price of that investment goes up, you lose money on your trade.

Stock options are the right to buy or sell a stock at a particular price within a specific amount of time. A call is the right to buy and a put is the right to sell. The buyer of the put expects the stock to drop in value so that he can buy the stock at a lower price, and put it to you at a higher price (or just sell the put at a profit).

The investor who shorts a put hopes that the price of the stock either stays the same or goes up, causing the put to become worthless and giving a profit of the amount the put was sold for.

So why would someone short a put instead of just buying the stock?

Let’s look at an example. Assume a stock is currently trading for $50 a share and the put option with a strike price of 50 (the price the put can be exercised at) is trading for 2, with 45 days to go. That means it is trading at $200 for the right to sell 100 shares of the stock at $50 per share.

The buyer of the put hopes that the stock will tank. So if the stock drops to 40, the intrinsic value of the put is 10, giving the put buyer a profit of 8, or $800.

So let’s look at the seller of the put.

If the stock stays at 50 by the expiration date, the put becomes worthless and the put seller makes $200. If the stock is above 50 at expiration, the put seller still makes $200. If the stock is at 48 after the 45 day period, the put seller breaks even. And if the stock does drop to 40, the put seller is out $800.

However, suppose the seller of the put, who is bullish on the stock, just buys 100 shares of the stock instead. If the stock dropped to 40 from 50 over that time frame, the buyer would be out $1,000 instead of $800.

Therefore by selling the put instead of buying the stock, you reduce your risk by the amount you sell the put for. There are some traders who continue to sell puts on the same stocks every two or three months over long periods of time.

When would you not want to sell puts?

If the puts are rarely traded and the spread on them, the amount between the bid and asked prices (what you can buy and sell the put for), is very wide, then it may not be worth it to short the put.

If the stock pays a high dividend and you are interested in owning the company for the dividend, then it’s probably not worth selling the puts on it.

If you are concerned about missing out on the opportunity cost of the stock going significantly higher in the time frame, then you are better off buying the stock instead of shorting the puts. In the same example, if the stock goes to 60, the seller of the put still gets $200, however the owner of 100 shares of stock will make $1,000.

So before you buy your next stock for a swing trade, you may want to check out the puts to see if they are worth shorting.

How to Make Money with Short Squeeze Stocks

by Fred Fuld III

Back in 2015, Keurig Green Mountain, Inc., jumped about 75% in one day, due to a takeover. The hedge fund manager, David Einhorn had a short position in the stock, which generated an enormous loss. But even a rumor of a takeover can send a stock higher, or even just good news, causing short sellers to scramble to cover their positions, creating what is called a short squeeze.

A technique that stock traders often use is buying short squeeze stocks. Here is a more extensive explanation of what a short squeeze stock is and what a short squeeze is.

When you short a stock, it means that you expect 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, and begins to rise, the short sellers jump in at once 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. Any type of positive news can trigger the short squeeze.

So other traders take advantage of this situation by looking for stocks to buy 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.

Let’s take an example. Cars.com Inc. is a stock that is heavily shorted. As a matter fo fact, 23.1% of the float is shorted. In addition, the number of shares shorted has increased by almost 2% over the last reported two week period. Finally, the short interest ratio is 25. That means it would take the short sellers 25 days to cover their positions, based on the number of shares that trade each day on average.

So what stocks are heavily shorted that may be worth a closer examination? Check out the following list, but be aware, that often some stocks are heavily shorted for a reason.

Company Symbol % change % of Float Days to cover
Invacare Corporation IVC 2.5 28.9 41
Zoe’s Kitchen ZOES 1.6 35.1 35
Seritage Growth Properties SRG 2.7 34.1 33
Maxar Technologies Ltd. MAXR 4.8 7.2 32
McEwen Mining MUX 0.9 19.6 31
Lannett Company, Inc. LCI 1.7 53 31
Lee Enterprises, Inc. LEE 0.5 8 29
AU Optronics Corp AUO 1.6 … 27
Acushnet Holdings Corp. GOLF 2 15.9 26
Gildan Activewear Inc. GIL 1.4 3.7 26
The Buckle, Inc. BKE 0.1 33.8 25
Cars.com Inc. CARS 1.9 23.1 25

6 Ways to Make Money in a Stock Market Crash

There are lots of ways to make money from a falling stock market, some speculative, and some not so risky. It’s great that these options are available, because small investors need a way to protect themselves, and even make money on the downside. Many traders and investors believe that the stock market has reached a peak. Here are several options to choose from.

1. Shorting Stocks

OK, let’s get this one over with first because it is one of the most speculative and risky ways of making money in a bear market. In simple terms, you make money when the stock goes down and you lose money when the stock goes up. What technically happens is that you borrow the shares and immediately sell them (this all is done electronically through your brokerage firm) and since you owe those shares, you eventually have to buy them back at some price, hopefully a lower price. The difference between your sale price and eventual purchase price is your profit.

Can you make a lot of money shorting stocks in a bear market? Yes. Is it speculative? Very. Can you lose a lot? Most definitely. This is why it is so risky. When you short a stock, the lowest point it can drop to is zero. Whereas, if the stock goes up, the amount it can increase is unlimited. Let’s say you short 100 shares of a stock at $20 a share. If you put up funds equal to 100% of the value of the shorted amount, and the stock drops to zero, you’ve made a 100% return. However, suppose the stock goes from 20 to 100, you end up losing 400% of your money with lots of margin calls along the way.

Have I shorted stocks? Yes. Have I made money from shorting? Yes. Have I lost a big chunk of my profits by closing out my short positions and going long, trying to predict the bottom? In the interest of full disclosure, yes. Several years ago, I made the second worse decision I could have made when shorting, and that is predicting the bottom of the market too soon. The worst decision would have been to hold on to my short positions after the market bottomed and started to make a quick rise. Often when the market bottoms at the end of a bear market, the rise is very sharp and fast, and can totally wipe out short position profits very quickly and then some.

Just before the big crash several years ago, shortly after I shorted a high priced stock selling for about $100 a share, the position went against me by 13 points. That’s a $1,300 loss for just one hundred shares in one day! I still had the short position after the market closed, and had the pleasure of trying to sleep at night, wondering if there was going to be a takeover the next morning or some other good news that would drive the price even higher, making my losses worse. Fortunately, the stock crashed along with the rest of the stock market and I ended up making a profit, but it was very stressful waiting for it to happen.

One way to hedge yourself is buy buying a call option on the stock you sorted, to protect yourself in the event the stock rises.

So in summery, do I think you should short stocks? Absolutely not. The risk is unbelievable. If you understand options real well, hedged short selling might be OK, as long as you are an experienced trader, and know what you’re doing.

2. Short (Bearish) ETFs

There is a type of Exchange Traded Fund called the Bearish ETF or Short ETF. What these ETFs do is provide a return opposite to the return of the index, sector, or industry that it is tracking.

For example, the Short Dow30 ProShares (DOG) provides a return that is the inverse of the Dow Jones Industrial Average. If the Dow goes down 2%, the DOG goes up 2%. The Short QQQ ProShares (PSQ) ETF gives a return that is the inverse of the NASDAQ 100 Index. If you are bearish on gold, you can buy the PowerShares DB Gold Short ETN (BGZ) ETF.

The nice thing about these short ETFs is that your losses are limited. Also, if you are long individual stocks that you don’t want to sell, these can be good for protecting your portfolio on the downside.

3. Leveraged Bearish ETFs

If you like volatility, you will love the leveraged bearish ETFs. What these ETFs do is provide double, and in some cases triple the inverse return of indices. One example is the UltraShort Telecommunications ProShares (TLL), the Rydex Inverse 2x S&P Select Sector Health (RHO), the UltraShort Consumer Services ProShares (SCC) and the Rydex Inverse 2x S&P Select Sector Tech (RTW).

In addition there are over a dozen triple leveraged bearish ETFs. Talk about price moves! The volatility of these things is unbelievable, and so are the wide bid and asked spreads that I’ve seen occasionally.

The advantage of these trading vehicles is that they are a way of shorting on margin, with a limit on the downside. The disadvantage is that the losses are quick and large, especially with the triple leverage short ETFs.

4. Bear Funds

It may be hard to believe, but there are actually a large number of bearish mutual funds for the long term bearish investors.

There are many bearish mutual funds, including the Grizzly Short Fund (GRZZX), the PIMCO StocksPlus TR Short Strategy Institutional Fund (PSTIX), and the ProFunds Bear Investors Fund (BRPIX). These funds have minimum investments ranging from $1,000 to $5,000,000.

I’m not sure why anyone would invest in these unless it is for some kind of a long term hedge.

5. Puts

A put is the option to put your stock to someone at a particular price within a certain period of time. In other words, if you own a stock that is trading at 22 and you buy a put at a dollar [puts and calls are priced on a per share basis, so a put at $1 would cost $100 for 100 shares] which gives you the right to put your stock to someone at $20 per share within three months, there are a couple of things that could happen. The stock could tank to $14 a share and you could put your stock at 20, or just resell the put for 6. You would be far better off than just doing nothing. And if the stock goes up or stays about the same, you are just out your $100 for the option. Puts can be useful for experienced traders.

6. Cash

There is one other way to make money in a bear market. Sell everything, and keep your money in cash, preferably a T-bill money market fund, that only owns T-bills. (Repos are supposed to be just as safe, but these days, I would look for the ones that just own the T-bills. I will cover repos in another article.) The advantages are that you can’t lose money and you can receive an income from the investment.

Hopefully, this post will provide you with some ideas to hedge your portfolio in the event the stock market does tank, and maybe even make money from the market drop.