FuelCell Energy (FCEL) Could Attract Short-Squeeze Speculation - FuelCell Energy (NASDAQ:FCEL)

It's no secret that clean energy technology specialist FuelCell Energy Inc FCEL has thoroughly struggled this year, with FCEL stock hemorrhaging about 77% of market value since the beginning of January. On paper, the underlying company's business of developing and delivering fuel cell systems — which convert hydrogen into electricity — is highly relevant. Unfortunately, declining revenue from prior years contributed to investor sentiment erosion.

In mid-November, management announced a global restructuring effort to reduce costs and focus on core technologies, part of an overall response to slower-than-expected clean energy investments. Within the plan, FuelCell stated that it would reduce its workforce by 17% and slash spending on product development, overhead and other expenses. The company anticipates that the directive will lower operating costs by approximately 15% in fiscal year 2025 compared to 2024.

Since announcing this strategic shift, FCEL stock has rebounded from the abyss. At its trough this year, shares traded hands for less than $6. However, since late last month, FCEL jumped above the all-important $10 technical support line. Should the bulls continue to maintain level flight, the energy specialist could potentially enjoy a sentiment reversal.

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Short-Squeeze Speculation Entices an Aggressive Long Strategy

Currently, FCEL stock ranks among Benzinga's Most Shorted Stocks list, a screener dedicated to securities that have attracted the most short interest. This label refers to the total number of shares of a company that have been borrowed and sold by speculators betting that the stock will fall.

The idea is that by borrowing and immediately selling a downbeat security, the speculator can pick up shares at a cheaper price. Following the return of the borrowed amount of shares back to the lending broker, the short trader pockets the difference as profit. Obviously, the target security must fall in value for a short position to be profitable.

Of course, with the market being unpredictable, short traders have incurred devastating losses due to the stock in question shooting skyward. When an unexpected bullish wave materializes, the upside pressure can be exacerbated. That's because a short trader must buy to close the position, creating in effect a self-fulfilling prophecy.

This upward panic — colloquially known as a short squeeze — can be incredibly powerful, especially if the contrarian bull gets in ahead of the panic.

Heightened Options Activity Tempts the Contrarian Mindset

To be fair, options volume for FCEL stock has been light compared to prior years due to the escalating financial challenges. However, activity has been picking up, particularly for out-the-money (OTM) call options. Though no definitive conclusions can be made, this development may suggest rising bullish interest in FuelCell stock.

Investors interested in taking an aggressive wager may consider a bull call spread strategy, specifically the 9/12 call spread for the options chain expiring Jan. 17, 2025. This trade involves simultaneously buying the $9 FCEL call and selling the $11 call. The credit received from the short call partially offsets the debit paid for the long call, essentially providing a discounted net long position. In this case, $159 is at risk for the chance to earn $141 (88.68% payout).

True, the bull call spread caps the reward at the short call's strike price. However, the benefit is that the threshold of profitability (or the breakeven point) is reduced. In the case of the 9/12 call spread, the breakeven price (at time of writing) sits at $10.59. Further, FCEL stock needs to rise about 12% to reach the short strike price, which is doable considering recent pricing activity.

Nevertheless, it must be said that FuelCell represents a high-risk, high-reward opportunity. Given the company's history, a continuation of its misery is well within the realm of possibility. However, the bulls’ ability to jump above the critical $10 threshold — combined with management's strategic pivot — could entice contrarian traders.

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