What happened

Shares of Co-Diagnostics (NASDAQ:CODX) were skyrocketing 35.4% higher as of 11:19 a.m. EDT on Tuesday. The big gain came after the company announced that it had entered into an agreement with Arches Research, a subsidiary of Polarity TE (NASDAQ:PTE), to expand Arches' use of Co-Diagnostics' Logix Smart COVID-19 test. 

So what

No financial details of the agreement between Co-Diagnostics and Arches Research were announced. So why did Co-Diagnostics' shares jump so much higher?

COVID-19 printed on blue background with two small red coronavirus models

Image source: Getty Images.

We could be seeing the signs of a short squeeze. As of Aug. 14, 2020, nearly 24% of Co-Diagnostics' outstanding shares were sold short. This percentage could be even higher after Abbott Laboratories announced FDA emergency use authorization in late August for its $5 COVID-19 antibody test that can deliver results within 15 minutes.

But Co-Diagnostics' announcement today underscores that its Logix Smart COVID-19 test continues to enjoy solid demand. Arches Research first began using Co-Diagnostics' COVID-19 tests earlier this year. In a statement, Co-Diagnostics CEO Dwight Egan said, "Arches has been an important customer in the ongoing battle against the coronavirus, and we expect this agreement will also create opportunities for sales of additional molecular diagnostic products in our development pipeline, including our upcoming Logix Smart Flu A/Flu B/COVID-19 test kit."

This good news could be causing some short-sellers to cover their positions in Co-Diagnostics. When that happens, it creates an environment that can lead to the kind of surge for the healthcare stock that we're seeing today.

Now what

Investors could learn more about how Co-Diagnostics' business is performing when Egan speaks at H.C. Wainwright's 22nd Annual Global Investment Conference on Sept. 14. In the meantime, any good news for the company could translate to disproportionately large moves for the stock if short-sellers head for the hills en masse.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.