Top 10 Most Shorted Stocks in 2022, Q4 PLUS How to Trade a Short Squeeze
This article was last updated on 10/18/2022.
As Q4 kicks off, bears are on the prowl like never before. However, in times like these, the market has a quirky habit of staging its most impressive rallies — using bearish bucks as fuel to the upside. Let’s look at exactly how short the market is, and which tickers are seeing the biggest action.
What is Short Interest?
Short interest is a representation of the quantity of shares that are currently sold short — meaning someone is selling a stock who doesn’t already own it, and the position is still open. Short interest is often expressed as a percentage — the total number of shares sold short divided by the total number of shares outstanding.
Short interest can also be expressed as a ratio, representing the number of days it takes short sellers to cover (or repurchase) their short position — the total number of shares sold short divided by the average daily trading volume. When a large percentage of the total number of shares in a stock are sold short, it can create the perfect breeding ground for a short squeeze.
What is a Short Squeeze?
To understand how a short squeeze works, you have to first understand that short-selling is an infinite risk trading strategy. We all know that investing involves risk — but it’s defined risk: You can only lose the amount you pay. Short selling involves infinite risk: You can lose more than the amount you paid, and a bad trade could theoretically send short sellers into a negative account value.
That means short sellers can only make these high-risk trades with the help of margin loans — money that a broker ‘loans’ the short-sellers upon opening a short sale trade. Where there are margin loans, there must also be margin requirements — a percentage of the trade that the short-seller must pay for with their own money. If a stock’s price rallies enough that it crosses over the margin requirement, brokerages may issue a margin call — a forced liquidation of the short-sellers position, unless they can add or free up more funds elsewhere.
That means that a single margin call or liquidation (and even the threat of one) can trigger a domino effect that forces short-sellers to rapidly close their positions, often at a loss. When there’s suddenly a swell of buyers (short-sellers must buy shares in order to close their short positions), and no change in the quantity of sellers, this can lead to rapidly appreciating prices — triggering more threats of margin calls and forced liquidation to other short-sellers, who must then join the frenzy. Add the snowball effect of momentum traders jumping onto the bandwagon hoping to take advantage of the trend, and you’ve got a recipe for truly gargantuan price-movement.
In short: Short squeezes occur when short-sellers are all rushing for the door to close out their short positions before things get any worse.
How to Spot a Short Squeeze
The preface: Oversold conditions in June foreshadow vicious short squeeze in July and August.
REWIND: On June 17th, the S&P 500 sank to its lowest point since December of 2020. Bears were loaded to the gills with put options, and the market was highly shorted. The RSI on the S&P 500 sank to 31. In short: There was a lot of short interest, and bulls were getting beaten down. What followed was nothing short of extraordinary. An 18% rally in the S&P 500 between June 18th and August 16th. More impressively: A series of short squeezes in the most highly shorted names in the market.
Suddenly, the most beaten down names started to experience colossal rallies, one-by-one. Names like Bed, Bath & Beyond (BBBY), Revlon (REV), FuboTV (FUBO), Microstrategy (MSTR) and more could be seen doubling in a matter of days, or sometimes even hours — often without any upside catalyst. Contrary to the headlines, it wasn’t the fault of Reddit traders. It wasn’t the “retail rebellion.” It was just the mechanics of the market, margin calls, and the massive game of chicken that is short selling.
It’s Q4: Meme Stocks Have Melted. Why Should We Care Now?
Let’s get one thing straight: No one wants to be a bag holder. And if you wait until the mainstream media is writing about the latest meme stock rally, then that’s likely what you’ll become. Case in point: All of the short-lived short-squeeze rallies from the above graphic.
This isn’t a call to avoid short squeezes, it just means you have to be nimble. If you’re a trader who wants to get in on one of these sharp, out-of-the-blue rallies, you need to be aware of the brewing market conditions before they erupt. And you need to be ready to exit before they melt down. In June, the highly oversold market was that breeding ground. As the market enters October, we could be setting up for short squeeze mania once again.
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Could Q4 Set the Stage for a Short Squeeze?
In nearly every metric, September has been more bearish, more oversold, and higher shorted than June.
Wake Me Up When September Ends: A Bearish Timeline
- 9/27: Lowest RSI since January 27th
- 9/27: Lowest S&P 500 close since November 2020.
- 9/23: Equity Put/Call Ratio indicates reading of over >1.0 for the first time since the Covid-19 Crash
- 9/23: Zerohedge reports highest put option volume in history
- 9/08: Bloomberg reports that institutional traders spent more money on bearish put premium in the first week of September than they had in any week since the 2008 Financial Crisis
Why it matters: The oversold, highly shorted June market is part of what led to the short squeezes in July and August. A similarly bearish environment in September could lead to a similarly short squeeze friendly market in October. However, in order to be ready for any potential short squeeze, you have to know where the highest short interest is.
Q4: Short Interest in the Top 5 Largest US Stocks
First, a comparative benchmark. In order to understand what a “normal” amount of short interest looks like, let’s look at the short interest in the top 5 largest stocks on the US exchanges.
- AAPL: Apple short interest: 0.72% (+2.66% MoM)
- MSFT: Microsoft short interest: 0.59% (+5.99% MoM)
- GOOG: Alphabet short interest: 0.31% (+3.03% MoM)
- AMZN: Amazon short interest: 0.76% (+9.06% MoM)
- TSLA: Tesla short interest: 2.05% (+4.81% MoM)
10 stocks primed to squeeze
If you look at the charts, you’ll notice that all of the top 10 most shorted stocks on this list have abnormally high volatility relative to the market, and many of them have been known to make explosive moves to the upside, even in lieu of a catalyst.
- ADTX: Aditxt short interest: 63.17%
- PXMD: PaxMedica short interest: 44.97%
- PMVP: PMV Pharmaceuticals short interest: 42.82%
- BBBY Bed Bath & Beyond short interest: 63.17%
- BYND: Beyond Meat short interest: 39.26%
- BIG: Big Lots short interest: 37.38%
- UPST: Upstart Holdings short interest: 36.69%
- MSTR: Microstrategy short interest: 35.34%
- CLAR: Clarus short interest: 34.57%
- ASAN: Asana short interest: 34.48%
OCTOBER 18th UPDATE
Since the writing of this article, some of these stocks have shifted in ranking. While the names above remain heavily shorted stocks, the following is the up-to-date list of the top 10 most shorted stocks right now (listed in terms of float shorted):
- PMVP: PMV Pharmaceuticals short interest 39.98%
- BBBY: Bed Bath & Beyond short interest 39.88%
- UPST: Upstart Holdings short interest 39.52%
- BYND: Beyond Meat short interest 38.23%
- MSTR: MicroStrategy short interest 35.80%
- VTNR: Vertex Energy short interest 35.59%
- TCDA: Tricida short interest 35.29%
- ALLO: Allogene Therapeutics short interest 35.16%
- BIG: Big Lots short interest 33.67%
- VERV: Verve Therapeutics short interest 33.53%
Notably, while some stocks rose through the ranks and others fell, overall, short interest has declined in most stocks over the past 18 days. Still, these figures are nothing to disregard. Take a look at the way high short interest has impacted the price action of these heavily shorted stocks in the past.
Short Squeeze Potential: Which Stocks are most likely to Squeeze?
When you read about the top 10 most shorted stocks in October, many names may look foreign to you. You won’t find most of these stocks on Reddit. But take one look at the chart, and you’ll see that these highly shorted tickers don’t move like the average stock. Though they may not have performed the kind of stellar squeezes that Bed Bath and Beyond has seen, they’re often prone to double digit intraday moves — both up and down. For option traders — especially those trading short-dated options — being early on one of these moves could be a gamechanger. Let’s look at some recent moves of each of the top 10 most shorted stocks in October.
ADTX: Short squeeze of 323% in 3 days
On September 26th, shares of the highly shorted biotech company Aditxt rallied as much as 36% in one day before retracing half of the move and then soaring once again.
Two weeks prior, between September 11th and September 14th, an ADTX short squeeze sent shares higher by 323%, before dramatically falling to a fraction of their value. This is a common short squeeze theme — good as a trade, often not so good as an investment.
PXMD: Short squeeze of 40%, 100%, and 83% over three weeks
September kicked off with a bang for PaxMedica. Part of the allure of shorting biotech companies like PXMD, ADTX, and several of the other high short interest stocks on this list is that their success often hinges on the approval of a drug. That means a binary, “yes or no” outcome. That said, that “yes or no” outcome didn’t cause any of the September spikes seen above in PXMD. Names with high short interest are simply prone to much higher volatility than the average stock.
PMVP: +14%, no news
Before BBBY was a triple-digit gainer, it was making respectable moves like this. Though 14% gains sound small when compared to “hop on the rocket”-style short squeezes, these sorts of moves can still prove to make admirable trades when combined with the leveraging power of options.
Speaking of BBBY…
BBBY: Choppy action since last short squeeze
In August, shares of BBBY famously did this:
But these days, shares of BBBY are trading back in the single-digit range. And recently, there haven’t been any signs of life in this name.
That’s not to say there won’t be in the future, but as it stands, this name is stagnant. Remember: It takes momentum to kick off a short squeeze. They won’t want to “run for the exit” if there’s no sign of a fire. And waiting around aimlessly in a stagnant stock hoping for a short squeeze is a great way to gamble — but a poor thesis for a trade.
BYND: No massive squeezes, but plenty of tiny ones (+12%, no news)
Beyond Meat is a name that has remained in the top 10 most shorted stocks for a long time. Their mission is noble — to create sustainable, plant-based alternatives to all kinds of meat. However, the high cost has prevented the company from ever reaching profitability. Still, on days where the market moves higher (like September 28th), the momentum tends to push BYND along with it. It’s no doubt that BYND’s ability to gain 12% on no news is a result of its abnormally high short interest.
BIG: Recent 1D rally +8%, no news
As we continue down this list of the top 10 most shorted stocks in October, the trend is forming: these are some of the highest beta, highest volatility stocks on the market. This +8% move in the discount retailer Big Lots is an example.
UPST: +8% 1D rally, retrace to baseline, and another +8% rally the following day
More of the same here from AI loan company Upstart — +8% and a return to baseline in the same day, followed by another 8% rally the following day. If it isn’t clear already — when trading short squeezes, taking profit when the opportunity arises is a must.
MSTR: +19% in four days
Highly shorted business intelligence company Microstrategy is the second largest company by market cap on this list. Why is Microstrategy so heavily shorted? It could be because Microstrategy owns more bitcoin than any other business in the world. That high exposure to crypto adds additional beta to an already high beta name. When crypto is rising, you can bet that Microstrategy will be going along for the ride.
CLAR: +7% in two days, no news
More of the same phenomenon here from highly shorted outdoor equipment company Clarus. +7% in just two trading days with no news to be found.
ASAN: +16% over three days, no news
Rounding out the top 10 most shorted stocks is the largest company by market cap on the list: Asana. But the large market cap hasn’t prevented shares of ASAN from being on the receiving end of high volatility price action. Between September 26th and September 29th, shares of Asana squeezed 16% higher without any news or catalyst (other than a broader green market).
Squeezability: When to Expect a Short Squeeze?
In general, you should think of heavily shorted stocks as ultra-sensitive, high beta names. When we talk about volatility, velocity, and volume — these stocks are the pinnacle. So it should be no surprise that on a day where the Nasdaq is trading higher by 2%, these stocks often have the power to make it to double digit percentage gains. Is it a short squeeze? Is it a rally? The semantics don’t really matter. It just matters that you’re aware of these high volatility names so that you can pounce when the time is right. Likewise, when the Nasdaq, the S&P 500, or the Small Caps are trading deep in the red, these names will be on their journey to the center of the earth — especially if they’re just rallied. The above example in Aditxt (ADTX), the most shorted stock in the market right now, is a great example of this phenomenon. ADTX ripped 323% in 3 days. In the following three days, it shook off all of those weekly gains and then some, closing the week out with just half the value it began at. Once again, this isn’t a reason to avoid short squeeze trades. It’s a reason to always take profit when the opportunity arises, and not to be afraid to play these heavily shorted stocks on the downside as well as the upside.
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