Shares of Nikola Corp. (NASDAQ: NKLA) drops in early trading session on Monday as the cutting into paper earnings for traders betting against the electric-vehicle company and setting them up for a short squeeze.
According to S3 Partners LLC statistics, short sellers lost more than $80 million in paper gains this week. Traders that bet against Nikola are currently ahead only $55 million in 2023.
Even though shares fell 15% on Friday, short sellers might still be burnt. Earlier increases in the trading day followed the request for leadership change by the company’s former founder, Trevor Milton, a remark that Nikola claimed was in “direct violation of the agreements” he made when he departed. The stock is dropped 99% from its high in 2020.
The stock rose as much as 8% in after-hours trading Friday after the business announced plans to lay off around 10% of its workers in an effort to slash expenses.
The managing director of predictive analytics at S3, Ihor Dusaniwsky said that they are witnessing the beginning of a short covering squeeze and anticipate that additional shorts will reduce their short exposure in NKLA and realize some of the profits they gained earlier in the year. On Thursday, Nikola received S3’s highest short squeeze score of 100.
Shorting Nikola has gotten increasingly expensive as the number of shares available for borrowing has decreased, preparing traders for a squeeze, which occurs when traders hurry to exit their contrarian positions by purchasing back the stock they’ve shorted. The occurrence frequently causes stock prices to rise, placing more pressure on short sellers attempting to reduce their losses.
Options traders have also moved from negative to optimistic, with calls for Nikola trading at an all-time high this week. The implied volatility on three-month options reached its highest level since July 2020, and the skew — which measures the relative value of calls versus puts — flipped from 14 points in favor of puts at the end of May to around even on Friday, indicating increased demand for bets on the stock rising.
The majority of Nikola’s profits this week appear to have come from retail trading. According to Vanda Research, net retail purchasing in Nikola surpassed $4 million on Thursday alone, a record influx after almost two years of little trade.
The rebound shows that “speculation is running rampant again,” according to Matthew Maley, chief market analyst at Miller Tabak + Co. “It shows that the stock market is getting frothy again on a short-term basis,” he explained.
The advances have also pushed Nikola shares above the critical $1 mark, allowing the company to comply with a Nasdaq requirement that requires listed stocks to have a minimum closing price of $1 per share.
This month, a burst of recent news has bolstered electric-vehicle and technology stocks. Coherent Corp., which just introduced new laser processing heads for EV production, is also recovering and on track to rise for the sixth time in a row. The stock gained 7% on Friday, bringing its weekly gains to 41% this week.
Meanwhile, Tesla Inc. ended a streak of 13 straight sessions of advances earlier this week, owing to the Federal Reserve’s hawkish stance and market technical. The winning run has increased the company’s market value by more than $240 billion.