The Allure of Short Squeeze Penny Stocks: High Risk, High Reward Trading
Penny stocks, typically defined as stocks trading under $5 per share, offer traders massive upside profit potential but also higher risk due to greater volatility. When penny stocks become heavily shorted, meaning a high percentage of the shares are held by investors betting the price will decline, it can set up a volatile “short squeeze.” This happens if the stock price starts to rise rapidly. Savvy traders constantly analyze penny stocks with high short interest, looking for opportunities to profit from these explosive short squeezes.
Understanding Short Selling and How It Works
Short selling is a trading strategy where an investor borrows shares of a stock from a brokerage and immediately sells those borrowed shares at the current market price. The goal of short selling is to profit from a subsequent decline in the stock’s price.
At some point in the future, the short seller will need to repurchase the shares in order to return them to the brokerage. If the price has dropped as the short seller expected, they can buy back the shares at a lower price. They can then return them to the brokerage and pocket the difference as profit.
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However, short selling carries inherent risk. If the stock price rises after the shares are sold short rather than falling, the short seller will eventually have to repurchase the shares at a higher price, resulting in losses. The potential losses are theoretically unlimited, since a stock’s price can keep rising indefinitely. Due to this risk, short selling is primarily used by experienced traders looking to profit from a company’s perceived weaknesses or an overvalued stock price.
How a Short Squeeze Occurs and Pushes Prices Up
A short squeeze happens when a stock that has been heavily shorted suddenly sees its price spike higher. This is typically due to positive news, a strong earnings report, or even concerted buying by a group of traders. This forces investors who shorted the stock to rush to “cover” their short positions. That means they have to buy back the shares they initially sold short.
This wave of buying from short sellers needing to cover their positions drives the stock price even higher. As short sellers compete to limit their losses by covering shorts, it creates a cascading “squeeze” on remaining short positions. This can send the stock price skyrocketing within days or even hours. Traders anticipating these explosive short squeezes can profit enormously from the rapid price spikes.
Why Traders Target Heavily Shorted Penny Stocks
Stocks with high short interest, meaning a high percentage of total shares are held short, can offer lucrative trading opportunities for several key reasons. First, experienced traders are constantly looking for short-squeeze setups. They are trying to buy shares of a heavily shorted stock before the price spikes due to short sellers rushing to cover positions. Being early into a short squeeze means much higher profit potential.
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Secondly, heavily shorted stocks allow for contrarian trading strategies. When a stock has high short interest, it often means the overall market sentiment is very negative or pessimistic about the company’s prospects. Savvy traders look for situations where they believe the market is being overly pessimistic. They see short interest as an indicator of value. If the negativity is overdone, the stock could be primed for a rebound.
Finally, some portfolio managers use positions in heavily shorted stocks to balance out or hedge risky long positions in stocks they expect will go up in price. If a trader has big exposure to potential upside in one stock, shorting an overvalued stock can provide some insurance in case of broader market decline.
The Risks and Rewards of Trading Short Squeeze Penny Stocks
While trading around potential short squeezes in penny stocks can produce massive percentage returns in a short period of time, these trades come with significant risks. The main risk is that the high level of short interest is actually correctly predicting the stock’s decline. If short sellers are right that the stock is fundamentally overvalued or the company is in trouble, buying into a short squeeze can lead to substantial losses.
To mitigate risks, traders need to thoroughly research any short squeeze opportunity, looking for bullish signs that the market is wrong about the stock’s outlook. Proper position sizing and smart use of stop losses help control the downside when trading these extremely volatile penny stocks. While inherently risky, short-squeeze penny stock trades can provide traders with asymmetric profit potential if conducted strategically.
Penny Stocks To Watch
- fuboTV Inc. (NYSE: FUBO)
- ImmunityBio Inc. (NASDAQ: IBRX)
- Altimmune Inc. (NASDAQ: ALT)
fuboTV Inc. (FUBO)
Professional sports seasons are getting started once again and that means entertainment stocks could be a fan favorite. fuboTV is an online pay-TV service offering traditional channels without a cable subscription. The company’s platform also offers a level of interactivity as a sports-first outlet. It gives viewers the ability to engage with content they’re watching through features like FanView, which lists stats and scores in real time. It also offers the ability to stream 4 separate channels at once and in 4K HDR resolution.
While the Disney-ESPN news put a damper on things in the stock market this week, shares of FUBO have started recovering over the last few sessions. fuboTV recently chose Digital Harmonic’s KeyFrame for advanced video pre-encode filtering. It will allow further enhancement of video quality and allow for “significant” bitrate reduction.
What’s happening with FUBO stock and short traders? According to data from TDAmeritrade, the FUBO stock short interest sits around 17%.
ImmunityBio Inc. (IBRX)
Biotech penny stocks have come under pressure recently as the overall market has sold off. However, this isn’t the case for all stocks in the industry. ImmunityBio is an example as shares have risen significantly over the last week. The initial move was triggered on Monday when the company announced a near-half-billion dollar debt financing from its founder Dr. Patrick Soon-Shiong and Nant Entities.
With this new financing from Dr. Soon-Shiong , including the extension of the maturity date of current debt, ImmunityBio believes that it is well-positioned to fund its ongoing business operations and pre-commercialization efforts as it continues to drive toward a potential regulatory approval of N-803 plus BCG for BCG-unresponsive non-muscle invasive bladder cancer.
This influx of capital has allows ImmunityBio to extend the maturity date on existing debt. It also provides them with funding to advance their pipeline programs, most notably N-803. N-803 is an investigational therapy that aims to treat non-muscle invasive bladder cancer unresponsive to standard BCG treatment. With Dr. Soon-Shiong’s continued support, ImmunityBio is optimistic about bringing N-803 plus BCG to market for bladder cancer patients in need of new treatment options. The company remains focused on progressing N-803 through regulatory approvals while also advancing other assets in their diverse immunotherapy pipeline.
What’s going on with the IBRX stock short? According to data from TDAmeritrade, the IBRX short float is sitting around 20.75%.
Altimmune Inc. ( ALT)
Altimmune has been slowly battling back this week after a long stretch of selling pressure to the penny stock to new 52-week lows of $2.34. There were a series of accompanying analyst adjustments made with price target cuts. Although many remain much higher than current trading levels.
The company recently announced that it completed dosing in its 48-week Phase 2 MOMENTUM trial. It evaluated the efficacy and safety of its pemvidutide in obese patients or those considered overweight.
Vipin K. Garg, Ph.D., President and CEO of Altimmune, explained, “We believe pemvidutide offers a highly differentiated product profile that includes significant reductions in body weight, serum lipids, and liver fat, without increases in heart rate or other cardiovascular safety signals. We also believe this combination of attributes has the potential to demonstrate best-in-class benefits in future cardiovascular outcome trials.”
As for the ALT stock short float, Fintel data shows this sitting around 12.20%.
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