Depomed Buyout Rumors Trigger Possible Short Squeeze

For Depomed Inc DEPO short sellers, 2017 is off to a nightmarish start. Shares are surging more than 10 percent on Tuesday after the New York Post reported that private equity firm KKR & Co. L.P. KKR will officially be making a buyout offer for the biotech stock in coming days.

For a short seller, news of a buyout is often a worst-case scenario. No matter how much research a short seller does or how poorly a business is performing, buyout offers can be extremely unpredictable and have a major, instant impact on a stock’s share price.

For Depomed bulls and other owners of heavily-shorted stocks, buyout rumors provide a double shot in the arm. Not only is the buyout bid usually offered at a significant premium to market value, fears of a buyout can send short sellers scrambling to cover their positions. The resulting short squeeze can be a major trading opportunity.

In the past year, Depomed shorts have piled on, and the stock’s short interest is up 21.7 percent.

According to shortsqueeze.com, Depomed currently has an elevated short percent of float of 24.8 percent. The stock has more than 12.5 million shares held short with 7.6 days to cover.

If these short sellers believe the buyout rumors are true, Depomend’s 10 percent Tuesday morning move could just be the beginning of a major short squeeze.