Why A Nikola Short Squeeze Could Be Coming 'Very Soon'

Volatility in Nikola Corporation NKLA continued on Tuesday following reports that the SEC is investigating the company in response to allegations by Hindenburg Research that Nikola is an “intricate fraud.”

On Monday, S3 Partners analyst Ihor Dusaniwsky said volatility could get ramped up a notch if Nikola experiences a short squeeze in the near future.

Extreme Volatility: Nikola shares jumped 11% on Monday after the company denied the allegations and General Motors Company GM CEO Mary Barra said the company had a “very capable” team vet Nikola prior to their new partnership.

Nikola shares have been all over the map in the past week, initially jumping as high as $54.56 when the GM deal was announced and then dropping below $30 in the days following the release of the Hindenburg report. Short sellers have made a killing on the fraud allegations up to this point, but Dusaniwsky said Monday the Nikola short-seller party could soon come to an abrupt end.

Nikola currently has $327.5 million in short interest, or about 7.5% of the stock’s float. That short interest has increased by 1.3 million shares in the past week.

That short interest is relatively modest compared to other auto stocks, and Dusaniwsky said Monday the majority of the trading since the GM news came out has come from existing longs selling their stakes and new longs swooping in to buy the dip.

No Shares To Borrow: Short sellers looking to bet against Nikola following the fraud allegations are running into a big problem -- lack of loan availability.

“Because non-insider NKLA holders are predominantly retail based who are not active lenders of stock nor in margin accounts and there are not many institutional or hedge fund holders who actively lend stock or whose stock is rehypothicated and lent out, the overall lendable supply of NKLA stock is very small,” Dusaniwsky said.

On Monday, new Nikola short sellers were paying borrow fees in the 25% to 30% range, according to S3.

At this point, Nikola short sellers have endured $229 million in mark-to-market losses in 2020, but they were up $58 million in profits for the month of September as of Monday’s close.

“We will probably see a short squeeze in NKLA very soon if its stock price continues to shrug off bad news and climb on good news, but at the moment the short squeeze is just sitting at the top of the hill and building up potential energy,” Dusaniwsky said.

Benzinga’s Take: The combination of extreme headlines and potential short squeeze suggests Nikola will continue to be extremely volatile and unpredictable in the near term. Long-term investors should consider staying on the sidelines for at least a week or two to let the dust settle on what has been an extremely chaotic week for the company.

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