Thanks to the stock market crash this year, plenty of penny stocks are trading at significantly lower prices. That has brought about the topic of shorting stocks. If you don’t trade options, shorting can present opportunities to make money when stocks drop. Shorting can also create a scenario for a short squeeze to occur. To understand how a short squeeze happens, we’ll first define shorting. Then we’ll explain the makeup of a short squeeze and where to start regarding short-squeeze penny stocks to watch.

How Do You Short Stocks?

Shorting stocks is a way to take advantage of a stock sell-off. To short a stock, you borrow shares from your broker and sell them in the open market. If the stock price falls, you’d buy the repurchase the share price, then return them to the broker you borrowed them from, pocketing the difference as profit.

Here’s a step-by-step guide to shorting a stock:

  • Find a brokerage that allows you to short stocks.
  • Determine how many shares you want to short.
  • Place a short sell order.
  • Monitor your short position.
  • Cover your short position. When you’re ready to close your short position, you’ll need to buy back the same number of shares you borrowed and sold. Then you’ll return them to the broker you borrowed them from. If the stock’s price has fallen, you’ll be able to repurchase the shares at a lower price, resulting in a profit.

It’s important to understand that short selling carries a high level of risk. The potential loss is theoretically unlimited. The price of a stock can rise indefinitely. This means you could lose more money than you invested because you’ll have to repurchase shares much higher than where you sold initially. In this case, when prices rapidly rise, it can create the perfect environment for a short squeeze.

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What Is A Short Squeeze?

For example, you might’ve heard this term alongside GME and AMC stocks. Their epic breakouts brought plenty of attention to this phenomenon. A short squeeze is when a heavily shorted stock suddenly experiences a sharp price increase, forcing short sellers to buy back the stock to cover their short positions. This can create a “squeeze” on short sellers, who are pressured to buy back the stock quickly to avoid significant losses.

Here’s how a short squeeze can occur:

  • A stock becomes heavily shorted. When many investors sell a stock “short,” they are betting its price will fall.
  • The stock’s price starts to rise unexpectedly. If the stock’s price rises unexpectedly, short sellers may feel pressure to buy back the stock to cover their short positions.
  • Short sellers start buying back the stock. As short sellers start buying back the stock, it can create additional demand for the stock and push the price even higher.
  • The stock’s price keeps rising. As the stock’s price continues to rise, it can create a feedback loop, with short sellers continuing to buy back the stock to cover their positions, pushing the price even higher.

It’s important to note that short squeezes can be risky for both short sellers and other investors. Short sellers may suffer significant losses if they are unable to cover their positions before the stock’s price rises too much. On the other hand, investors may also experience losses if the stock’s price rises too quickly and then falls back down. Short squeezes are extremely volatile and, many times, will end just as quickly as they began.

How To Find Penny Stocks With Potential For A Short Squeeze

There are several ways you can find stocks that are experiencing or are at risk of experiencing a short squeeze:

  1. Look for stocks with a high “short interest ratio.”
  2. Use financial news sources and social media. Short squeezes often occur when there is unexpected positive news about a company or its industry, or when there is a short squeeze being played out in a related stock. Paying attention to financial news and social media can help you identify stocks that may be at risk of a short squeeze.
  3. Use technical analysis. Technical analysis involves analyzing a stock’s historical price and volume data to identify trends and patterns that may predict future price movements. Some technical indicators, such as the Bollinger Band, can be useful for identifying stocks that may be at risk of a short squeeze.
  4. Use financial websites and tools like PennyStocks.com. There are many financial websites and tools that can help you find stocks that are experiencing or are at risk of experiencing a short squeeze. Some popular options include Finviz, Yahoo Finance, and MarketWatch.

It’s important to remember that short squeezes are difficult to predict and can be risky. If you’re considering adding a stock to your watch list that you believe may be at risk of a short squeeze, do your research. Carefully consider the risks before making any decision to add (or remove) something from your watch list.

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StocksShort-Squeeze Penny Stocks To Watch

Now that we’ve got some of the basics out of the way, let’s take a look at some of the penny stocks with high short interest right now. We also take a look at any recent or upcoming events or potential catalysts that could be notable.

Summit Therapeutics Inc. (NASDAQ: SMMT)

A ‘repeat offender,’ as some may say, Summit Therapeutics is no stranger to short squeezes. The penny stocks experienced a quick move earlier this year that put them on scanners ever since. Summit partnered up with Akeso in a deal for up to $5 billion earlier this month. The deal will see the two focus on in-licensing ivonescimab and support Summit’s directive of developing and commercializing oncology pipeline products.

“Ivonescimab has demonstrated the potential to deliver superior clinical benefit for patients and tremendous value for investors,” said Dr. Michelle Xia, Co-founder, Chairwoman, CEO, and President of Akeso, in the December update. Summit is beginning development activities for the platform (as SMT112) and plans on starting to treat patients in clinical studies during the second quarter of next year.

Is it a short squeeze penny stock to watch? According to data from Fintel.IO, the SMMT stock short float percentage sits at around 17.9%.

penny stocks short squeeze stocks Summit Therapeutics SMMT stock chart

PaxMedica Inc. (NASDAQ: PXMD)

Another one of the stocks familiar with short squeezes is PaxMedica. We’ve followed the penny stock for over a month. During that period, PXMD stock has managed to experience several single-day and multi-day moves quickly. With a short float percentage sitting around 26%, according to Fintel, and around 55%, according to TDAmeritrade, some are looking at this on their list of short-squeeze penny stocks to watch.

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The company recently entered into a purchase agreement and rights agreement with Lincoln Park Capital Fund for up to $20 million. PaxMedica plans to use any proceeds for working capital to support its growth. One of the tenets of its model is advancing its lead program, PAX-101, in treating Autism Spectrum Disorder.

However, the primary focus of traders has been on PXMD stock and its current short interest. Whether or not a “squeeze happens is to be seen. However, as they say, knowing is half the battle.

penny stocks short squeeze stocks PaxMedica PXMD stock chart

Gossamer Bio Inc. (NASDAQ: GOSS)

Finally, Gossamer Bio joins this list of penny stocks with high short interest after new data emerged. According to Fintel and TDAmeritrade, the short float percentage on GOSS stock sits between 18.82% and 23.8%. It might seem probable that this would have higher short interest if you look at the stock chart. You’ll notice a massive drop earlier this month, which came after disappointing news.

Gossamer announced Phase 2 trial data in its study of seralutinib for treating pulmonary arterial hypertension. Among several points of focus was a serious adverse event in the seralutinib arm of the study. In addition, overall treatment-emergent adverse events were reported in 86% and 93% of patients in the placebo and seralutinib arms. Even in light of these results, there was some optimism regarding the path ahead for the treatment.

Dr. Ardeschir Ghofrani, Professor of Pulmonary Vascular Research at Justus Liebig University, Giessen, Germany, and Head of the Pulmonary Hypertension Division at the University Hospital in Giessen, said, “The efficacy results generated with seralutinib in the context of a favorable safety and tolerability profile highlight compelling potential differentiation for seralutinib as an anti-proliferative, anti-inflammatory, and anti-fibrotic therapeutic candidate with possible reverse remodeling effects.”

penny stocks short squeeze stocks Gossamer Bio GOSS stock chart

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