Options Corner: EOS Energy Is A Mess But Short Squeeze Speculators Smell A 117% Payout

Although the push for energy independence has long represented a political catalyst, it can't unilaterally save participating enterprises from turmoil. Just look at what happened to Eos Energy Enterprises Inc EOSE recently. Following an abrupt termination of a high-level executive along with an upsized convertible note offering, EOSE stock tumbled badly. Still, with so much bad news baked in, there could potentially be a reactionary response.

To be sure, holding any contrarian (and thus positive) view on Eos Energy symbolizes a highly risky proposition. According to a report by CFO Dive, the battery manufacturer terminated CFO Eric Javidi earlier this week on Tuesday "effective immediately." Raising eyebrows — and perhaps some red flags — was that Javidi was only in the role for about three months.

Adding to the headwinds moving against EOSE stock is the latest announcement of an upsized $225 million convertible note offering. Such arrangements often hurt equity value due to the risk of dilution and wider investor uncertainty. Because convertible notes are debt instruments that can be converted into equity, they are liable to dilute the share pool. This is also problematic because convertible notes can usually be converted at a discount to the stock's future market price.

If that wasn't enough uncertainty, insiders have been selling EOSE stock since September 2024. To be fair, insider transactions can be difficult to interpret, particularly because there are several reasons why insiders sell their own securities — many of them mundane. Still, it's also fair to say that it's not a great look given the context.

Bears have expressed concern that Eos' projected full-year sales of about $15 million fall short of prior guidance of around $45 million. The miss is primarily due to supply chain delays and manufacturing difficulties, which point the finger toward execution risks.

A Potential Short Squeeze Adds Speculative Intrigue To EOSE Stock

To be 100% clear, no one is making the argument that EOSE stock is a compelling investment. More than enough serious concerns exist to warrant long-term skepticism. But even a sinking boat will occasionally offer air pockets that can facilitate short-term survivability. Thanks to the leverage and defined risk-reward profile of multi-leg options strategies, it may be possible to extract quick alpha.

First, EOSE stock features wildly high short interest. On March 14, the security's short interest reached 40.75% of its float. From then on, the size of the float — or the number of shares outstanding that are available for public trading — changed dramatically, thus making short interest calculations difficult. However, Fintel reports that the latest metric hit 30.1%, which tracks with the historical data.

Bottom line? It's a sky-high figure, which ordinarily isn't a good sign because it means that skepticism has soared. On the other hand, if the bulls decide to pick up the discount, the bears would find themselves staring at the wrong end of the barrel. Keep in mind that in order to close a short position, bearish speculators must buy to close. Subsequently, an upswing can create a panicked positive feedback loop known as a short squeeze.

Second, market breadth data — or the study of accumulation and distribution patterns — suggest that investors could soon buy the dip in EOSE stock. Currently, the security is printing a "7-3-U" sequence: seven up weeks, three down weeks, with (surprisingly) a net positive trajectory across the 10-week period.

Notably, in 72% of cases, the following week's price action results in upside, with a median return of 12%. Should EOSE stock close the week at $4.10, there's a solid chance that it could pop to around $4.59 within a week or two.

Swinging For The Fences The Smart Way

With the above market intelligence, the one trade that arguably stands out the most is the 4/4.50 bull call spread expiring June 20. This transaction involves buying the $4 call and simultaneously selling the $4.50 call, for a net debit paid of $23. Should EOSE stock rise through the short strike price at expiration, the maximum reward is $27, a payout of over 117%.

There are two reasons why this idea is so tempting. First, as a baseline, EOSE stock suffers from a negative bias. On any given week, the chance that a long position will be profitable is only around 47%. Therefore, the sentiment regime inherent in the 7-3-U sequence raises the odds in favor of the bullish speculator. No guarantees exist, of course, but the shifting probabilities empirically favor a debit-based bullish strategy.

Number two, along with the higher probability of upside, the median response is usually very robust at 12%, which provides more than enough fuel for EOSE stock to hit the aforementioned short strike price. Of course, the median response also doesn't provide any certainty. However, the legitimate prospect of a short squeeze adds credibility to this forecast.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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