Spirit Airlines, Inc. SAVE shares are trading lower Wednesday. Investors are concerned. The company failed to file its earnings report and said it is in talks with its creditors to develop a restructuring plan.
Despite this, there is a chance the stock may be about to head higher. This is why it is our Stock of the Day.
What Happened: In the second quarter, the company lost $1.76 per share. In the first quarter, it reported a loss of $1.36 per share. This information can be found on Benzinga Pro.
Some traders sense opportunities to profit. A short squeeze may be about to force the stock higher.
Short sellers borrow shares and sell them. The intent is to buy the shares back in the future at a lower price. Then they will return them and keep the difference in price. Short sellers want a stock to go lower.
If the price moves above the level they sold short at, they begin to lose money. Some get nervous and buy the shares back before the losses become excessive. This pushes the price higher.
This makes other short sellers get nervous as well, and they buy their shares back. As a result, the price moves even higher.
A short squeeze can occur in a stock with a large amount of short selling. This is the case with Spirit Airlines. The short interest is 35%. This means that 35% of the outstanding shares have been sold short.
This is an extremely high number. As a comparison, the short interest of Apple is less than 1%.
The dynamic driving a short squeeze is the fact that all of the shares which are short will need to be bought back.
If the stock price continues to move upwards, some people who lent the short sellers shares will call the loan in. The short sellers will be forced to go into the market and buy regardless of the price. This action can create a buying frenzy that results in a dramatic rise in the stock.
Successful traders know markets can act in unexpected ways. Even though the news is bad, a stock may still move higher. This could be the case with Spirit Airlines.
Photo: Courtesy Spirit Airlines
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