Hey There Income Hunters,
I hope you were all on for Frank Gregory and Josh Hawes yesterday as they lifted the lid on “hard to borrow” stocks in part two of the Option Short Squeeze Series.
Josh and I spent some time a few years ago working on a way to break the Wall Street mob’s stranglehold on the hard-to-borrow space …
This underground world of stock loans was kept so quiet for so long that even today it remains the only crucial industry marketplace that isn’t electronic.
But such is the Street’s power that it has fought off third-party vendors willing to provide transparency, liquidity and security to a critically important market for 30 years.
In our case, Josh and a fellow genius built a revolutionary system that could pull in all option prices and create synthetic long/short stock positions for comparison to stock prices and stock loan rates …
And, most times, there was much more profit in the trade if you used the synthetic position through options!
Sounds great, right?
Well, I’ll let you in on a secret … When someone tries to improve Wall Street, the banks are happy to let them in the door and soak up all the information.
Then, if they see value, they just replicate it internally …
It’s like dealing with China!
But I remain firmly on YOUR side, and today I’ll show the simplest way to anticipate a possible short squeeze — and a list of stocks that have a high percentage of shorts that could be great candidates to ride high if conditions are right …
Reversal Conversion Arbitrage — Wait, What?
Applying “reverse conversion arbitrage” was the foundation for the system Josh and his brainiacs built.
Whoa, Griff, that sounds complex!
Well … it is!
But the basics will help you understand the behind-the-scenes workings of the squeeze plays
Here’s how it works …
Reverse conversion arbitrage takes put-call parity and adjusts for the hard-to-borrow fee, then converts that into a discount or premium versus the strike price …
(Option Pit Director of Education did an awesome job running through how it works in this video.)
The hard part was turning the process into an electronic marketplace — but Josh and co. pulled it off.
We’ll never know how successful it could have been — thanks to the banks’ collusion! — but the experience was certainly worth it.
And, even better for you, we can help the Option Pit community make some easy money riding the squeeze play …
Positioning Early for the Squeeze Play
We know the Reddit crowd loves to squeeze
And the first thing they look for these days is a stock that has a large short base, as measured by the “short float,” or the percentage of shares shorted related to the total number of shares in a float. (Taking a step back, a float is the outstanding number of shares available for trading, less restricted or otherwise inaccessible shares.)
I’ve observed the Meme Mob is usually after 20% or higher short float and also beaten down stocks.
Can you imagine how many candidates there will be if/when we get a serious correction? (Which I think is coming MUCH sooner than many people realize.)
The table below shows almost 30 stocks that may meet the credentials — for my purposes, 25% percent or greater float and market cap above $1 billion.
The key is to find a good technical setup you can lean on and look for an inexpensive way to play the stock from the long side.
From there, follow these steps:
- Build a small portfolio of candidates you don’t mind owning
- Buy with an inexpensive option strategy and risk-manage the position with a stop loss
- Limit your losses to 5-7%
- Run with the profits using trailing sell stops
Bring It Home
You always want to develop simple trading plans that allow you to easily manage a process — and the squeeze play is one such strategy.
Once you have a plan for a high-short float stock, the rest is easy.
Then if it gets squeezed, well, you’re off to the races.
Questions or comments? Drop them below!
Have a great weekend everybody and as always …
Live and Trade With Passion My Friends,