HHey There Income Hunters,
Playing in heavily shorted stocks can generate some monster rewards.
Of late, there has been no clearer evidence of that than the ongoing GameStop Moonshot.
One of Wall Street’s most hated stocks has soared to record highs.
Charts don’t lie …
Bloomberg reported that one investor has turned a little more than $53,000 into $11 million.
When it comes to the hard-to-borrow names (stocks with a limited supply for short-selling), options can give you a heads up on the “squeeze play.”
That’s when the costs for borrowing stock rises forcing the shorts to cover.
Big call buying can reveal insider info that borrow costs are about to rise …
Check out the increase in calls ahead of GameStop’s big move …
The Genius Is Back
Michael Burry, the famous hedge fund manager and inspiration for the movie The Big Short, is now making a fortune being long GameStop …
In August 2019 he purchased 3 million shares of GameStop, and as of Q3 2020 he was still long 1.7 million shares …
At the high Monday, GME was up an incredible 5,868% since Aug. 2019.
Burry may have been in there letting some more shares go yesterday.
I mean, look at this incredible move!
Somebody get Christian Bale on the line for the sequel!
What Drives the Squeeze Play?
Let’s take a look at squeeze play that has sent GameStop to the stratosphere.
A squeeze play, remember, gets its name from the shorts getting squeezed on the cost to borrow the stock. If painful enough, it can cause the short to cover, sending prices even higher.
GameStop shares had fallen 72% in 2019 after a series of disappointing earnings reports and worries over its future in the digital-download landscape.
Enter Michael Burry, who stepped in at the most pessimistic point with the stock down around $2.
Burry believed that both the Sony and Microsoft next-generation consoles were likely to have “physical” optical disk drives, which would be supplied by GameStop.
He also played down concerns over competition from new videogame streaming competitors like Alphabet’s Stadia.
“The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible. [But] it looks worse than it really is,” Burry said in an interview with Barron’s at the time.
THAT is the foundation for a squeeze play.
Many willing sellers based on the consensus narrative and a few geniuses envisioning a monster-shot home run.
Keep an Eye on Floating Stock
More shorts than floating stock set the squeeze play in motion.
Floating stock is the number of shares available for trading of a particular stock …
It’s calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares.
Game Stop’s short interest, meaning demand to borrow the stock, recently reached an incredible 71.2 million shares, which was 144.34% of floating supply. See below…
That set the stage for the squeeze play. Once the short interest (SI 71.2M) rises above the float (49M) there is no longer enough stock to cover the shorts and the shorts are squeezed, meaning they must buy back their shares …
Below is a list of names with high hard-to-borrow interest versus the float …
One company on the list that I think is very interesting is Bed, Bath and Beyond.
The company has been buying a tremendous amount of its own shares, plus the short interest is almost 70% of the float …
The $25-$30 level would be an excellent location to open a long position.
You have two potential positive forces at work… Short covering, plus the company stock purchases…
Bring it Home
Follow the Stock Borrow Market. It can give you great insight to flows in and out of the underlying price. You can request a hard-to-borrow report from your broker…
Every so often you can find the rocket fuel that will provide supersized gains.
Live and Trade With Passion My Friends,
PS – Here’s a shot of Christian Bale playing Michael Burry in The Big Short, which is a top-10 movie for me.
It’s entertaining and provides a realistic education on what drove the bursting of the housing bubble …
I like it almost as much as the Bed, Bath and Beyond play I mentioned above …