FEATURED CONTENT

[Cash Out] Next IPO Poised to Pop!

Want a piece of the next Uber, Lyft or Pinterest when it IPOs?

Get your seat at the table and learn how you can capture these explosive moves before others!.

Join now to lock in Founding Member Pricing for a Limited Time!

Why shorting biotechs can be risky

Kyle DennisKyle Dennis ·

Biotech stocks tend to be very volatile, and that has some traders thinking that they will revert to the mean after any nice run. But with the potential for positive catalysts — like successful clinical trial data — the danger of shorting a biotech hoping for it to revert to the mean is heightened. You could be looking at a pop-and-go situation, where the stock simply moves higher.

Consider the case of Cara Therapeutics (CARA) , a clinical-stage biotechnology company, where someone might have shorted the stock after a significant run in the wake of the U. S. Food and Drug Administration (FDA) granting the company a breakthrough-therapy designation for its lead drug candidate. Cara then reported that it would be continuing Phase III trials of I.V. CR845 in patients with post-operative pain. These positive catalysts sent the stock higher, without any reversion to the mean.

There were signs that you might not have wanted to short Cara. Here are some key statistics:

Source: Finviz.com

When a stock has a short interest, or short float, above 20%, it’s usually an indication that shorts could get squeezed, in the event of a positive catalyst. That said, if you were part of this 23.89% of floating shares that were short, you would have gotten squeezed after Cara Therapeutics had two positive catalysts.

As you and the other shorts were rushing out of the stock, it simply pushes the price higher.

Here’s a look at how the stock performed as the shorts were squeezed after these catalysts.

Source: TradingView

The bottom line

Biotech and pharmaceutical stocks get increasingly volatile around news events, and when the stock has a high short interest coupled with a low float, it could indicate that the shorts might get squeezed and the stock might jump significantly higher if the catalyst event turns out positive.

#-#-#

  Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.

You may also like

Exclusive System Tracks Wall St. Insiders

“Dollar Ace Simply Exposes Information That Wall Street Wants To Keep Quiet” Said Kyle Dennis
“One member, Wesley M., has already reported 360%+ gains in just a few short days. Don’t miss this!”
(Reserve Access Now)

“What Recession?!” Jason Bond nets $55,060 in realized profit in One Day

After going 6 for 6 on profitable trades recently, we caught up with Jason to ask how he did it.
Check out Jason’s exclusive interview revealing this tightly guarded strategy. (Watch Now)

RagingBull.com Co-Founder, Jeff Bishop, Launches High Conviction Trade Service

“We listen to our clients and we give them EXACTLY what they want, so we designed a service to deliver 1 trade, 1 time a week, with a 100%+ PROFIT TARGET, directly to your inbox every Monday before the market opens. (Read More)

Be a Better Stock Trader, Starting Today

Get the expert insights, tips and strategies you need to optimize your trading skills and profiles
START NOW