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A short squeeze occurs in the stock market when investors who have taken short positions in a stock (betting that its price will fall) are forced to buy shares to cover their positions as the stock's price unexpectedly rises. This upward price movement can be triggered by positive news, robust earnings reports, or other factors that drive demand for the stock. As short sellers rush to buy shares to limit their losses, the increased buying activity further drives up the stock's price. The term "squeeze" arises from the pressure on short sellers to quickly exit their positions, contributing to a rapid and sometimes dramatic increase in the stock's value. Short squeezes can lead to significant market volatility and create challenges for investors on both sides of the trade.
Long vs Short: How it Works and What Fuels the Short Squeeze
When an investor takes on a long position or buys a stock, the maximum possible loss is limited to 100% of the capital invested. Conversely, because short sellers borrow shares to sell, there is theoretically no upper limit. If a stock rises significantly, there is no ceiling on how high it can go. Because the short side is much riskier, when a trade goes in the wrong direction (up) for shorts, they are forced to rush and “buy to cover” (close out their positions), adding further upside fuel to the stock. The higher the stock goes, the more this phenomenon snowballs.
What You Need to Know
Trading heavily shorted stocks has pros and cons. The primary benefit is that there is more upside potential. Conversely, the main negative of trading short squeezes is that these stocks tend to be more volatile and carry more risk. To combat the risk, investors can:
· Choose to not trade them at all.
· Trade them smaller and have a stop loss in place.
· Buy call options so there is limited risk (I only recommend this for experienced traders)
Below are three short-squeeze candidates:
#1
Taser Competitor Gains Momentum
Axon Enterprise ((AXON - Free Report) ), formerly known as Taser, is up a mind-boggling 46,267% since its inception. The non-lethal weapon maker is popular among law enforcement agencies worldwide and brings in more than $1 billion annually. Despite the massive revenue, AXON’s products are highly controversial and are technically lethal in many cases (a Taser “stun gun uses 50,000 volts of electricity to subdue someone). In fact, according to Reuters, the number of stun gun-related deaths is soaring and seems to be trending higher each year.
Image Source: Reuters
Disrupting the Non-Lethal Market
That’s where Wrap Technologies ((WRAP - Free Report) ) comes into play. A BolaWrap is a non-lethal law enforcement tool designed to restrain individuals safely and at a distance. Instead of using electricity, the handheld device launches a Kevlar cord with weighted ends, creating a temporary but secure restraint around a person’s body. Law enforcement agencies are taking note. Last quarter, revenues more than doubled year-over-year and have been trending higher since 2019.
Image Source: Zacks Investment Research
Currently, the stock is flirting with 52-week highs, and should it break out, its 12% short interest should help add fuel to the fire.
#2
Victor Gets the Spoils
Zacks Rank #1 (Strong Buy) stock Carvana ((CVNA - Free Report) ) is an online auto retail platform where customers go to buy and sell used cars entirely online. The company offers a wide selection of pre-owned vehicles, and the entire car buying process, including financing and delivery, can be completed through their website. Carvana aims to simplify and modernize the car-buying experience.
Last year, Carvana was on the brink of bankruptcy. However, the company secured funding during the 2022 bear market, turned around their business, and never looked back. Now, things are looking up for the leader in online auto sales, to say the least. The stock is up more than 500% over the past year, and yesterday, competitor Vroom announced it is shutting down. With less competition, CVNA should grab a larger share of the market.
CVNA shares are breaking out of a beautiful falling wedge pattern, and should the break out hold, the eye-popping short interest of 44.8% of the float should boost the stock even further.
Image Source: TradingView
#3
Digital World Acquisition (), The third short-squeeze candidate, is not for the faint of heart and has already squeezed 183% this month. DWAC is the holding company for Donald Trump’s social media platform “Truth Social.” Though the stock has already moved quite a bit, it may gain more momentum if Trump continues to dominate the Republican Primary in New Hampshire. 7% of the float is short.
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Fuel to the Fire: 3 Short-Squeeze Candidates
What is a Short Squeeze?
A short squeeze occurs in the stock market when investors who have taken short positions in a stock (betting that its price will fall) are forced to buy shares to cover their positions as the stock's price unexpectedly rises. This upward price movement can be triggered by positive news, robust earnings reports, or other factors that drive demand for the stock. As short sellers rush to buy shares to limit their losses, the increased buying activity further drives up the stock's price. The term "squeeze" arises from the pressure on short sellers to quickly exit their positions, contributing to a rapid and sometimes dramatic increase in the stock's value. Short squeezes can lead to significant market volatility and create challenges for investors on both sides of the trade.
Long vs Short: How it Works and What Fuels the Short Squeeze
When an investor takes on a long position or buys a stock, the maximum possible loss is limited to 100% of the capital invested. Conversely, because short sellers borrow shares to sell, there is theoretically no upper limit. If a stock rises significantly, there is no ceiling on how high it can go. Because the short side is much riskier, when a trade goes in the wrong direction (up) for shorts, they are forced to rush and “buy to cover” (close out their positions), adding further upside fuel to the stock. The higher the stock goes, the more this phenomenon snowballs.
What You Need to Know
Trading heavily shorted stocks has pros and cons. The primary benefit is that there is more upside potential. Conversely, the main negative of trading short squeezes is that these stocks tend to be more volatile and carry more risk. To combat the risk, investors can:
· Choose to not trade them at all.
· Trade them smaller and have a stop loss in place.
· Buy call options so there is limited risk (I only recommend this for experienced traders)
Below are three short-squeeze candidates:
#1
Taser Competitor Gains Momentum
Axon Enterprise ((AXON - Free Report) ), formerly known as Taser, is up a mind-boggling 46,267% since its inception. The non-lethal weapon maker is popular among law enforcement agencies worldwide and brings in more than $1 billion annually. Despite the massive revenue, AXON’s products are highly controversial and are technically lethal in many cases (a Taser “stun gun uses 50,000 volts of electricity to subdue someone). In fact, according to Reuters, the number of stun gun-related deaths is soaring and seems to be trending higher each year.
Image Source: Reuters
Disrupting the Non-Lethal Market
That’s where Wrap Technologies ((WRAP - Free Report) ) comes into play. A BolaWrap is a non-lethal law enforcement tool designed to restrain individuals safely and at a distance. Instead of using electricity, the handheld device launches a Kevlar cord with weighted ends, creating a temporary but secure restraint around a person’s body. Law enforcement agencies are taking note. Last quarter, revenues more than doubled year-over-year and have been trending higher since 2019.
Image Source: Zacks Investment Research
Currently, the stock is flirting with 52-week highs, and should it break out, its 12% short interest should help add fuel to the fire.
#2
Victor Gets the Spoils
Zacks Rank #1 (Strong Buy) stock Carvana ((CVNA - Free Report) ) is an online auto retail platform where customers go to buy and sell used cars entirely online. The company offers a wide selection of pre-owned vehicles, and the entire car buying process, including financing and delivery, can be completed through their website. Carvana aims to simplify and modernize the car-buying experience.
Last year, Carvana was on the brink of bankruptcy. However, the company secured funding during the 2022 bear market, turned around their business, and never looked back. Now, things are looking up for the leader in online auto sales, to say the least. The stock is up more than 500% over the past year, and yesterday, competitor Vroom announced it is shutting down. With less competition, CVNA should grab a larger share of the market.
CVNA shares are breaking out of a beautiful falling wedge pattern, and should the break out hold, the eye-popping short interest of 44.8% of the float should boost the stock even further.
Image Source: TradingView
#3
Digital World Acquisition (), The third short-squeeze candidate, is not for the faint of heart and has already squeezed 183% this month. DWAC is the holding company for Donald Trump’s social media platform “Truth Social.” Though the stock has already moved quite a bit, it may gain more momentum if Trump continues to dominate the Republican Primary in New Hampshire. 7% of the float is short.