How to Make Money on Short Squeeze Stocks
In this lesson you will learn how to make money on short squeeze stocks.
You probably have your criteria for what you like in a stock. You guys know mine. Small cap stocks between $200 million and $2 billion market cap, beta greater than 1.5, price under $10, and volume greater than 1 million. But there’s one more level that you may not even know about. I’m talking about the short interest.
Making Money on Wall Street
Short interest is more important than you think. Short interest adds a whole new layer to your stock trading that can help you nail down more winning trades. If you’re like most people, you probably ignore the short interest but there are a lot of traders quietly making money on shorted stocks.
Knowing how heavily a stock is shorted is extremely valuable because it’s like having a crystal ball. Those short sellers are going to have to cover their positions at some future point in time. This means that you can calculate the future buy side demand coming into a stock by knowing the short interest! Why? Because for a short seller to exit out of a trade, he has to buy the shares back to cover his short. That’s huge! It’s the next best thing to having a crystal ball because you know exactly how much buy side demand is going to occur from short covering!
There are a couple of websites traders use for making money on shorted stocks. You can subscribe to a service like ShortSqueeze.com that will give you the short interest on a stock or you can find this information out for free, albeit delayed, by going to the NASDAQ’s Short Interest web application at http://www.nasdaq.com/quotes/short-interest.aspx#.USpjQmfmDIs
When using the NASDAQ’s website, after putting in a ticker and clicking the Go Now button, on the next screen notice the “Days To Cover” metric:
This is NOT how many days shorts have to cover. It’s just saying that if this many shares are short, and the stock trades this many shares per day, here’s how many days it would take for all short sellers to close out their positions.
Money Making Stocks 2013
My teacher, who taught me how to make money on shorted stocks, is Jason Bond. Jason Bond ranked #3 out of more than 10,480 traders by the independent tracking firm Profitly. Being able to see the exact chart setups of a world-class trader like Jason Bond is really going to help you improve your own trading and make money on Wall Street. Below are some of the stocks he made money doing a short squeeze on in 2013 (click on the charts to enlarge).
Seeking Alpha came out with an article bashing CRRS. Short sellers piled into the CRRS. Jason Bond knew that too many short sellers piled into the stock too fast because the Seeking Alpha article really was not that bad. He waited for the RSI to break above 30 and come out of oversold and he pounced on a candle over candle pattern. Just 3 days later he sold the stock on the doji and the long upper shadow for a gain of over 90%.
ROX had been traveling up a lower trend line. It had a history of big moves off the trend line after the period of low volume. It also bounced of the RSI 50 line repeatedly and that was the level the market set for support. Jason Bond studied the stock’s news releases and found that an insider, Phillip Frost, was buying large amount of shares on the open market. This gave the stock the added dimension of being a turn around story stock.
When the stock pulled back to the trend line Jason was ready to make his move. The question became when would the short sellers, who shorted the stock when it spiked up 2 weeks earlier, begin to cover their short positions? When Jason saw huge buying coming into the stock and he figured that a candle over candle would form on the daily chart by market close, he entered the stock. Jason sold 4 days later for a gain of over 40%.
RSOL was one of Jason Bond’s core swing trading stocks back in October of 2013. It is important to establish your core money making stocks so that you can track them very closely while you patiently wait for a good entry. RSOL had a history of doing huge swing move ups repeatedly on the chart making it an excellent swing trading stock. Anytime the short interest in RSOL got above 2 days to cover, the stock would pop.
Jason tracks the solar sector and he noticed that solar stocks started to rip higher. Jason naturally went to one of his favorite swing trading stocks RSOL. In just 3 days he made a 20% profit.
Making Money Stock Market
There are several important lessons to take away about making money in the stock market:
1 – Add the dimension of making money on shorted stocks to your tool box. Track the short interest in a stock and look for short squeeze setups. Determine at what level the short interest days to cover usually hits before rocketing back down. As a general rule, any stock with more than 3 days to cover short interest is a short squeeze candidate.
2 – Join Seeking Alpha and follow people where a stock moves when they write an article. If a stock moves down because someone on Seeking Alpha bashes a company, look up the short interest and see if the short selling was overdone. The key to making money on shorted stocks is calculating the probability of a short squeeze happening off a certain level using the short interest days to cover metric.
3 – Look for stocks that have a history of bouncing or squeezing off a support level.
4 – Establish a core of money making stocks that you can go back to time and time again when the chart sets up.
5 – Put stocks on your watch list then patiently wait for the set up. Do not chase. Timing is everything. If you miss the move that’s ok. You can catch the next move.
6 – Buy on a candle over candle reversal or a candlestick with a long lower shadow. Sell on a candle under candle reversal or a candlestick with a long upper shadow.
Frequently Asked Questions about Shorted Stocks
What does short interest mean?
Short interest is the total number of shares of a particular stock that have been sold short by investors. Short interest measures open short sales that have not been covered or closed out.
GoodMorningWallSt posted the excellent video below called The Meaning of Short Interest Ratios.
What is short interest days to cover?
Short interest days to cover is the amount of shares that are currently shorted, divided by the average daily volume:
Many new traders erroneously believe that short interest days to cover is how long short sellers have to cover their short positions. That is not true. Days to cover is simply a way to evaluate the possibility of a short squeeze in a stock by measuring the future buying pressure on a stock that will happen when short sellers buy back shares to close out their short positions.
PerfectStockAlert posted the excellent video below called Short Interest Ratio or Days to Cover Ratio.
What is short interest ratio?
The short ratio is another name for the short interest days to cover ratio. The ratio is calculated by dividing the number of shares sold short by the average daily trading volume:
The ratio is the number of days it takes short sellers on average to repurchase all the borrowed shares. It is an excellent way to measure the probability of a short squeeze occurring. Any short interest days to cover reading above 3 is a short squeeze candidate. The higher the days to cover reading is, the greater the probability of a short squeeze provided the company does not go bankrupt.
Manny Backus posted the excellent video below called Short Ratio – What It Is and Why It Matters.
What is short interest reporting?
Short interest reporting is required by FINRA. Firms are required to submit short interest reports bi-weekly, in all securities including NASDAQ, NYSE, NYSE MKT, NYSE Arca and OTC equity securities.
Firms are required, per FINRA Rule 4560 (Short-Interest Reporting), to report gross short interest existing in each proprietary and customer account.
ZacksInvestmentNews posted the excellent video below called The Short Ratio. The stock picks from the short interest screener Zacks talks about are not relevant today because the video is older; however, the video has lots of good tips about using short interest in your trading.
What causes a short squeeze?
A short squeeze is caused when there is a lack of supply and an excess of demand for a stock.
A short squeeze causes a rapid increase in the price of a stock when short sellers cover their positions. This often occurs when the price of a stock has risen to a point where short sellers must make margin calls, or cut their losses and get out of the short position. Short sellers covering their positions involves buying shares and so the short squeeze causes the price of the stock to rise even more.
Short squeezes often occur in stocks with a small market cap and small floats.
EquityScholarTeam posted the excellent educational video below called Stock Trading the Short Squeeze.
What does a short squeeze look like?
A short squeeze looks like a giant upside down ‘V’ pattern:
The short squeeze does not always give back all of its gains, but it always has a large retracement after the short squeeze ends:
The reason short squeezes form these high inverse ‘V’ pattern peaks is that the buying that is driving the stock up is not legitimate bullish buy side demand coming from an earnings surprise, new orders, etc. It is buy side demand coming from short sellers getting hit with margin calls. Once the short squeeze ends, the stock usually comes crashing back down. The success of your short squeeze will depend on your ability to sell a stock into the upward move as close to its peak as possible.
Jason Bond posted the video below on how he plays short squeezes for massive profit.
What stocks short the market?
The stocks that short the market are called Bear ETFs (Exchange Traded Funds).
You can trade in and out of a short ETF just like you would a regular stock. You don’t need to have a margin account either because you are going long the short ETF just like any other stock.
Some popular stocks that short the market are:
Short (1x), UltraShort (2x), UltraPro (3x) MarketCap ETFs
Short QQQ (PSQ)
Short Dow (DOG)
Short S&P 500 (SH)
Short Mid Cap 400 (MYY)
Short Small Cap 600 (SBB)
Short Russell 2000 (RWM)
UltraShort QQQ (QID)
UltraShort Dow 30 (DXD)
UltraShort S&P 500 (SDS)
UltraShort Mid Cap 400 (MZZ)
UltraShort Small Cap 600 (SDD)
UltraShort Russell 2000 (TWM)
UltraPro Short QQQ (SQQQ)
UltraPro Short Dow 30 (SDOW)
UltraPro Short S&P 500 (SPXU)
UltraPro Short Mid Cap 400 (SMDD)
UltraPro Short Russell 2000 (SRTY)
OptionsEducation posted the video below called Shorting the Market using Inverse and Leveraged ETFs.
What are the most shorted stocks?
The most shorted stocks can be found easily, at any time, by using a stock screener. The method below is better than searching for an financial article because those articles are dated and do not provide you real-time intelligence on heavily shorted stocks.
To find the most shorted stocks, do the following:
1. Go to Finviz here.
2. Click on Screener:
3. Now for “Float Short” select “High (>20%)”:
4. Finally, click the “TA” tab:
The list of stocks that appear are the most heavily shorted stocks on Wall Street.
To find short squeeze candidates, focus on small caps with a beta of greater than 1, and an average daily volume of over 1 million shares. The chart should show a stock at a major support level with a history of squeezing off that level. Below are a couple of examples of the kind of charts you are looking for:
The most important part of your research should be the catalyst. What bit of news is going to cause short sellers to cover their positions and start a short squeeze?
In the video lesson below you will hear Jason Bond talk about how to make money on shorted stocks. Enjoy!