It’s a Short Squeeze Market: Top 10 Most Shorted Stocks in August, 2022

Over the past month, stocks like Bed Bath & Beyond (BBBY — up another +42% on the day as of 8/16, and +360% month-over-month), Revlon (REV), Invitae (NVTA), Microstrategy (MSTR) and many more have been the beneficiaries of truly massive rallies. What do they all have in common? Three words: High short interest. Below, you’ll find some of these names on the list of the top 10 most shorted stocks in the market — but first, let’s look at what short interest and short squeezes are, and how they can cause rallies like the ones below.

Pictured: Stellar short-term rallies in BBBY, CVNA, EVGO, FUBO, HTRX, MSTR, NVTA, PACB, and BNGO (read left to right, top to bottom). All 9 stocks have high short interest. Source: TradingView. Expanded View Here.

What is Short Interest? 

Much of the recent “meme stock mania” is centered around the concept of short interest. Short interest is a representation of the quantity of shares that are currently sold short — meaning 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’ maneuver. That means these high-risk trades can only be made with the help of margin — money that a broker ‘loans’ the short-seller in order to make the trade. That means these trades also have margin requirements — a percentage of the trade that the short-seller must pay for with their own money. If the trade begins to run too-far in the wrong direction, crossing over the margin requirement, brokerages may issue a margin call — a forced liquidation of the short-seller’s position, unless they can add or free up more funds elsewhere.

That means that a single margin call and liquidation (or even the threat of one) can often generate a domino effect that triggers short-sellers to rapidly attempt to close their position 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 to 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 effect of momentum traders jumping onto the bandwagon hoping to take advantage of the trend, and you’ve got a recipe for some 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. 

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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: 0.67%
• MSFT: Microsoft short interest: 0.52%
• GOOG: Alphabet short interest: 0.26%
• AMZN: Amazon short interest: 0.67%
• TSLA: Tesla short interest: 2.90%

While Tesla has made waves for how much it has cost short-sellers in the past (sorry Bill Gates), that 2.9% short interest is nothing compared to the top 10 most shorted stocks on the market.

Top 10 Most Shorted Stocks

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. 

1. BBBY: Bed Bath & Beyond short interest: 47.22%
2. ICPT: Intercept Pharmaceuticals short interest: 45.12%
3. HRTX: Heron Therapeutics short interest: 39.56%
4. SWTX: SpringWorks Therapeutics short interest: 38.77%
5. BIG: Big Lots short interest: 37.66%
6. MSTR: MicroStrategy short interest: 36.51%
7. UPST: Upstart Holdings short interest: 35.73%
8. BGFV: Big 5 Sporting Goods short interest: 35.28%
9. BYND: Beyond Meat short interest: 35.12%
10. EVGO: Evgo short interest: 34.98%

Honorable Mentions: 5 Popular High Short Interest Stocks

• FUBO: Fubotv short interest: 29.59%
• LCID: Lucid Group short interest: 22.96%
• GME: Gamestop short interest: 19.67%
• AMC: AMC short interest: 18.40%
• DWAC: Digital World Acquisition Corp short interest: 16.2%

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The Bottom Line: How to Trade a Short Squeeze

Stay disciplined. Staking a large amount of your portfolio on any one of these names is a fool’s gambit. Only trade one of these names (or any name) with an amount you’re willing to lose. Discipline also means taking profit as soon (and as often) as possible. If you’re trading options in anticipation of a short squeeze, rolling is highly encouraged. You want to get to the point of “playing with house money” as soon as possible — that means removing at least your cost-basis from the trade.

Be nimble. No one can predict when a meme stock rally will kick off. Sitting and waiting while long calls in any of these names is a great way to get theta-decayed to death. It’s better to be nimble — that means waiting and watching for early signs of a rally, and having reaction time that’s fast enough to get in — and hopefully out — before the trend subsides. If you’re looking to make a particularly short-term trade, indicators like average true range will likely help you in planning your exit.

Search for catalysts. Sometimes it doesn’t take a catalyst to spur a quick trip to the moon for these stocks — but it’ll certainly help. For example, Microstrategy (the sixth most shorted name on our list) was assisted by the run in cryptocurrency. AMC’s most recent run was likely spurred by CEO Adam Aron’s introduction of “APE units”. GME saw a similarly large run last month when they introduced the “splividend” — a stock split with a subsequent dividend. None of these catalysts were incredibly bullish, but they were enough to create some momentum, which helped push the first domino of the short squeezes that eventually took place. 

By staying disciplined, being nimble, and watching for catalysts, you can improve your likelihood of successfully squeezing the shorts in any of the 10 most shorted stocks we’ve listed above.