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A Lesson In High Short Interest…And Mastering Your Setups

“Trying to do everything means you can do nothing.” Click To Tweet – JC

People always ask me which lessons our traders have given me that have made the most impact on my trading. Of course, setups are important. But even more importantly, it’s been the lesson that I must focus on a few setups that fit my trading style, risk tolerance and account goals, that also match the current market environment. You don’t need to know everything there is to know about the markets in order to make money. You may have heard the famous figure of speech that states, “The jack of all trades is the master of none.” So, where we focusing, you ask? Right now, our traders have been focusing on earnings and high short interest stocks that are ready to pop.

With the market chopping around and trading at extensions, our traders have been focused on big moves in single securities – one of their favorites is high short interest stocks. What does that mean? It means that there is an unusually high number of traders shorting the stock – and they when it becomes evident that they are wrong due to rising price, they start to panic. As price climbs further, their stops get taken out, which only further accelerates the buying of the stock. As they are forced to buy back their shorts (or cover), it causes a pop in price – known as the ‘Short Squeeze’. There are a lot of high short interest stocks, but which are the best to buy? You must pick ones in which the shorts are forced to sell.

Having high quality setups in your arsenal is imperative, and knowing how to play them properly is clearly critical to success, but you also must play them at the right time. “Buying high short interest stocks is an art, especially knowing when to focus on them, and then which stocks are better than others. You want to buy stocks that have high short interest, that are in an uptrend when the market is also in an uptrend, where you can see that shorts are finally giving up. What is the most important part? The market must be in an overall uptrend. That time is right now, so we have ideal conditions for high short interest candidates,” says Chris Brecher.

Let’s look at a few recent examples that we’ve done in our trading room, and analyze the how’s the why’s behind it, to utilize it properly next time it comes around.

Short Squeeze Candidate – Restoration Hardware (RH)

Let’s look at the play we caught in (RH) as our case study. On May 2nd, John and Henry identified (RH) as a good short interest play. They utilize our scanner (www.simplertrading.com/scanner) to find these plays. Then you ask, why did (RH) stand out? One look at this chart and John said, “Smells like a short squeeze to me.”

Restoration Hardware (RH) Daily Chart – May 2nd, 2017

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John F. Carter (RH) Daily Entry

John notes that it looked like a prime candidate for a short squeeze in the making. It was trading near all-time highs, had a daily and 195-minute squeeze, had high short interest, and, it was making a run into earnings. John and Henry note that short squeezes get especially amplified going into earnings when short sellers get nervous that the stock may have a solid earnings report, further wrecking their short position, which causes them to exit their position and buy. One look at the chart, and JC bought 10 (RH) calls for $2.27, which he later added on another 70 for $2.95. As Bruce states, “I love high short interest, because it’ll take a regular trade and turn it into an explosive trade.”

RH Daily Chart – May 15th, 2017 – The Result

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Within a few days, the stock price saw the ‘pop’ we were looking for, and (RH) traded $10 higher, where we closed out half of our options at a double for $6.50, and the remaining half at $9.70 – triple on our money.

What else was required to make money on this trade? Patience. How many new traders probably took profits once they were making money? John and HG know how these plays act, and that allowed them to hold on until they tripled their options. Do you need more patience in your life? Listen to HG in the mornings. He is our Zen master and master of patience. I promise, it will wear off on you!

Short Squeeze Candidate – 3D Systems Corporation (DDD)

Chris found (DDD) by running scans on Finviz, and he knew immediately that It fit all of his criteria. Market is in an uptrend, this stock in particular is in an uptrend (as defined by price above the 50 sma), it had 22% high short interest, and no resistance up ahead until $27 on the weekly chart. But what was the kicker? “Check out the reversal candle after earnings on the chart below,” Chris states. “Price shot down with the earnings report, but quickly reversed. The second it reclaimed price before the earnings, all of a sudden you have to think, shorts got a little nervous, it rallied on bad news – and every short knows where the resistance is on a weekly chart, at $27. With the current price hovering between $16-17, that is a big airhole up ahead, and lots of potential upside profits. When price breaks above resistance on the daily chart around $16, it’s a buy.”

(DDD) – Daily and 1 hour Chart – Entry Chart

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(DDD) Entry John F. Carter

As you can see, once price broke resistance on the daily chart, it just kept climbing. Check out an updated chart from May 15th, 2017. Just as Chris mentioned, there is no overhead resistance until $27 on a weekly chart, and we are still climbing higher.

(DDD) – Daily Chart – The Result

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(DDD) John F. Carter Trade Close

Unlike John and Henry, much of the time, Chris doesn’t give direct entries and exits with a specific strategy, and instead gives market analysis and allows traders to decide how they want to trade it themselves. As such, I don’t have precise entry and exit orders to show you. However, the price action speaks for itself. It could have been played in a variety of ways, either through stock, or aggressive or conservative options strategies. Take your pick!

The Conclusion

There will always be speculation about how long this rally will last – but does it matter? We can focus on the setups that we know work in the current market conditions, and use those to make money. Of course, nothing works 100% of the time, but mastering high probability trades within the right environment will give you your best shot. And right now, that means utilizing the short squeeze.

By learning how our traders identify and play these setups, you can learn how to play them yourself. Come join us in our trading room (if you haven’t already), and be on the lookout for the next short squeeze setup with us so you can learn the nuances of the trade – they aren’t all created equal! If you missed these plays, don’t worry – the key is learning how to identify this pattern the next time it comes around, so you can take apart in the action.

See you soon!

Danielle Shay

Danielle Shay

Danielle got into options trading after being introduced to Simpler Options by her father several years ago when she needed a career change. She was determined to become a trader so she could work from home with her infant son, make money on her own terms and learn a skill that will last a lifetime. Trading was a rough road in the beginning, but with a lot of studying and hard work, she’s now exactly where she wants to be. She’s a former teacher and translator, having taught elementary school in Costa Rica, and ESL to refugee women in the US, and various youth programs. Teaching and helping others is her passion, and now she’s turned her attention to helping aspiring traders learn this amazing skill.

3 thoughts on “A Lesson In High Short Interest…And Mastering Your Setups

  1. This trading room is amazing. Every one specialize in their style and every day you continue to learn. You cannot find what you learn in any book or any other trading room because of the mentors wealth of knowledge.
    “JC” And Team you all Amazing.

  2. Great article!! Very clear with Good content. I just keep learning more everyday from you!! Thank you Danielle!!

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