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Short Squeeze and Stock Options

Sometimes when making lemonade there’s just not anymore juice that can be squeezed out of a lemon. In investing, there’s a similar idea with shorting a stock, sometimes the investors shorting the stocks have piled on so much, there’s no way for the stock to go down anymore.

In general, short sellers of a stock have to close or buy back the stock they shorted at some point. There are the cases where the company goes bankrupt and the stock ceases to trade anymore, but in most cases short sellers have to exit.

Strangely, when more short sellers are exiting than are entering the price of the stock may actually goes up, even though there may not be any investors purchasing the stock for a long investment. So here’s this dog-with-fleas company that is not doing so hot, yet it’s stock price is going up due to the short sellers buying the stock in order to exit their positions.

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This phenomena where short sellers are exiting and the price of a stock is going up is commonly referred to as a short squeeze. Once the short squeeze begins, it often can become self-fulfilling, as the higher the stock price climbs, the more short sellers will decide they want to exit their positions, or be required to exit their positions if they receive a margin call.

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An investor might think a good way to find a short squeezed stock is to simply look for companies with very high short interest ratio. The calculation for short interest ratio would be the number of shares of stock shorted divided by the number of shares of stock outstanding. But, if a company has a very high short interest and also has adequate volume, then the investors shorting the stock can easily close their positions without affecting the price too much.

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A common method for detecting a short squeezed stock is to look for stocks of companies that have high short interest and also have low volume. A good parameter for finding a short squeezed stock is to examine the Days-to-Cover or Number-of-Days-of-Short-Interest.

Days-to-Cover refers to the number of days required, based on average daily volume, to purchase the total number of shorted shares.

For example, if a million shares of a stock are shorted and the average daily stock volume is one million, then the value of Days-to-Cover is 1 day.

In searching for a short squeeze condition, the larger the value of Days-to-Cover, the larger the potential for a short squeeze.

A company whose stock is being short squeezed is unlikely to go down, so the short squeeze provides a bottom for the stock’s price or acts like an artificial put option for protecting the position from a further drop in price.

Using PowerOptions powerful search engine, a search was made for stock’s of companies which appeared to be in a short squeeze and also had a nice return for a covered call investing position. A covered call investing position combined with a stock which has a bottom makes for a position with a high probability for return.

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The parameters used for the search were:

Number-of-Days-Short-Interest (Days-to-Cover) > than 30 days

Simple 50-day Moving Average(SMA50) > than Simple 100-day Moving Average(SMA100)

Price-to-Earnings (P/E) > than 0

Covered Call Potential Return > 2%

The idea behind these parameters was to find profitable companies, P/E greater than 0, with attractive covered call positions, Covered Call Potential Return greater than 2%, whose stock price was in an uptrend, SMA50 greater than the SMA100, and whose stock was in a short squeeze, Days-to-Cover greater than 30 days.

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After performing the search, a couple of companies popped up on the radar, Bank of the Ozarks (OZRK) and Ritchie Brothers Auctioneers (RBA). Of the two companies OZRK’s short interest of 27% was greater than RBA’s short interest of 14%.

With the higher short interest, Bank of the Ozarks appears to be the best candidate of the two companies.


Bank of the Ozarks provides retail and commercial banking products and services. Apparently the short investors thought Bank of the Ozarks would go bankrupt like a lot of other banks did during the economic recession. But in its recent earnings report, Bank of the Ozarks appears to have faired the economic recession in good order.

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OZRK’s stock price has been in a trading range between $20 and $26 over the last several months and is currently situated near the middle of that range.

OZRK Chart

A covered call investing position for OZRK for November looks interesting with a potential return of 3%. The position of interest to sell for a covered call investing position is the November 22.50 call option with ticker symbol OWIKX.

To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

[tags] dog-with-fleas, short squeeze, short sellers, investor, short interest, Days-to-Cover, Number-of-Days-of-Short-Interest, commercial banking [/tags]

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