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Short Squeeze and Stock Options part II

We’ve received a lot of questions, interest and comments regarding the article on short squeezes, “Short Squeeze and Stock Options”, so we’re going to follow that up with another article on short squeezes.

If you had followed the covered call investing position for Bank of the Ozarks (OZRK) selected in the previous short squeeze article, you would be sitting pretty right now, as the price of the stock has increased and the time value of the November 22.5 call option is approaching zero, so an investor could have already made about 3% on the covered call position for OZRK.

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Better yet, someone investing in the covered calls position could roll the November 22.5 call option into a December 25 call option and potentially make another 3% over the next month.

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One of the common questions concerning the short squeeze strategy is, “when do you get out?” Unfortunately, the best answer which completely answers this question is, “it depends”.

In the case of OZRK, a good time to exit might be when the stock price nears its all-time high price around $38. Another exit point might be when the Days-to-Cover drops to less than 20 or maybe 10 days. An exit is certainly in order if a company’s financial results start to falter. Another exit point to consider is when the company’s P/E returns to its long-term average or near its long-term high. For example, in the case of OZRK, it’s current P/E is around 12 and it’s P/E was around 20 at its peak price experienced in December of 2006, so maybe a good exit point for OZRK is when its P/E nears 20.

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One thing we need to clarify for short squeeze analysis is that the short interest data for stocks is only updated by the exchanges once a month, so just because the data your looking at indicates the Days-to-Cover is 45 days, it might not actually be 45 days. The Days-to-Cover might have been 45 days immediately following the monthly update, but it could be vastly different a couple of weeks following the release of the short interest information.

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In the previous article, of the two companies that popped up on the search radar, we selected OZRK because it had the highest short interest. The reasoning behind selecting a stock with a higher percentage short interest is because when the investors who are shorting the stock see it is heavily shorted they may become fearful and decide to exit their short positions which may push up the stock’s price. The higher the percentage short interest, the more likely the short investors will cover their positions.

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Hopefully that answered some of the questions out there, so now we’ll look for another company that might be a good short squeeze play.

Once again using PowerOptions powerful Internet search engine, Stratasys (SSYS) pops up on the short squeeze radar. Stratasys has a Days-to-Cover of 33 and a short interest of 15%. Stratasys’s P/E is pretty high at 81 and its profits are down and both are a result of the company’s struggles during the economic recession.

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Stratasys develops, manufactures and markets three-dimensional printers. Stratasys’s printers enables companies producing mechanical products to fabricate or “print” them to ensure the components are correct before committing to prototype or manufacture. Some examples of their product’s handiwork are shown below:


Stratasys’s income and profit were severely impacted by the plight of the auto manufacturers, which is why the short investors jumped on its stock. But Stratasys is not solely dependant on auto manufacturers and the company is starting to recover. Its stock price is up about 100% from its low price in March and well off of its two-year high around $28.

SSYS Chart

A covered call investing position for Stratasys looks interesting for December with a potential return of 3.7%. The timeframe for the realizing the potential return is 39 days. The position has a downside protection of 8.2%. As long as the price of the stock does not drop more than 8.2%, the position will return a profit. The call option of interest is the December 15 with ticker symbol QQGLC.

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] Bank of the Ozarks, short squeeze, time value, short interest, Days-to-Cover, Internet, economic recession, three-dimensional printers, SSYS, Stratasys Inc. [/tags]

One comment

  1. T. Christiansen

    Was just reading your option short interest articles. In part 2 you mention the data comes out once a month—summer of 08 (I think) the data became available 2X/month. This sure helps in not having such stale data.

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