Market Overview

Low-Float, Heavily-Shorted Stocks Are The Volatility Play Right Now

Low-Float, Heavily-Shorted Stocks Are The Volatility Play Right Now

There are always volatile stocks in the market. However, in recent months, a handful of big board-listed stocks have generated the kind of trading volatility typically reserved for penny stocks.

The DryShips Saga

The shipping industry was the primary focus of one of these trading frenzies back in November. DryShips Inc. (NASDAQ: DRYS) traded from under $4 to above $100 back down below $10 within a matter of days. Two months later, it is under $3. Other shipping names were involved as well, including Euroseas Ltd. (NASDAQ: ESEA) and Globus Maritime Ltd (NASDAQ: GLBS).

But it’s shippers aren't the only stock traders have been targeting.

This Week's Movers

GenVec Inc (NASDAQ: GNVC) surged from under $3 in mid-December to above $10 this week. EnteroMedics Inc (NASDAQ: ETRM) soared 1,320 percent in the first six trading days of 2017. Signal Genetics Inc (NASDAQ: SGNL) jumped from under $5 to above $17 in a single trading day this week.

Many of these moves haven't been accompanied by meaningful company news. What’s going on here?

It’s likely that most of these moves are short squeezes, but there’s more at play than the typical short squeeze. Not only do most of these stocks have extremely high short interest, they also have extremely low floats. The float is the number of shares available for trading on the opening market and may be significantly lower than the number of shares outstanding.

Stocks with extremely low floats don't even need high short interest to make explosive moves. Signla Genetics has a short percent of float of only 1.6 percent, but its minuscule float of 546,000 was likely the driving force behind this week's move. GenVec's short interest is only 2.4 percent, but its float is also only 1.8 million.

High Short, Low Float

When it comes to explosive short squeeze potential, the combination of high short interest and low float creates a cocktail as volatile and explosive as nitroglycerine.

When a short squeeze occurs in a typical stock, short sellers can cut their losses by throwing in the towel and covering at any point. However, when a stock has a low float, brokers may not have shares available to allow traders to close out their short positions at all.

Once the short squeeze ball gets rolling, the stock’s surge attracts momentum buyers and short covering. At some point when broker inventories get depleted, the stock can no longer be shorted either. In extreme cases, short squeezes can even force brokers to close out short positions at market price without the short seller’s consent. This rare phenomenon is called a “buy-in.”

Of course, most of these circumstances are temporary phenomena, and these stocks typically return to normal within weeks of their massive run-ups. But for traders that get in ahead of the move, they can make a year’s worth of profits in a matter of minutes.

Who's Next?

Traders looking to find the next epic short squeeze stock should consider the following list of stocks with the one-two punch of extremely high short interest and tiny float:

  • Helios and Matheson Analytics Inc (NASDAQ: HMNY)- Short interest 36.6 percent; float 733,000.
  • Dryships- Short interest 74.2 percent; float 1.0 million.
  • Cesca Therapeutics Inc (NASDAQ: KOOL)-Short interest 25.9 percent; float 1.5 million.
  • Skyline Medical Inc (NASDAQ: SKLN)-Short interest 24.2 percent; float 2.9 million.
  • Stone Energy Corporation (NYSE: SGY)-Short interest 44.8 percent; float 4.5 million.
  • Power Solutions International Inc (NASDAQ: PSIX)- Short Interest 33.2 percent; float 4.7 million.

Related Articles (GNVC + SGNL)

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