What happened
Shares of embattled electric-van start-up Workhorse Group (WKHS +0.00%) were trading sharply higher on Thursday, amid an apparent short squeeze that might have been triggered by members of a prominent Reddit investing group.
As of 10:45 a.m. EDT today, Workhorse's shares were up about 36.3% from Wednesday's closing price.
So what
Workhorse is one of several stocks enjoying unusual rallies this week. Like many of the others, the company was once favored by members of Reddit's WallStreetBets group -- and like many of those other stocks, a significant percentage of Workhorse's shares have been sold short by investors betting on a decline in its share price.
Those short-selling investors might now be victims of a short squeeze, the term used when a heavily shorted stock surges higher, leading short-sellers to rush to close out (or cover) their short positions by buying the stock. In the past, members of WallStreetBets have triggered share-price surges by buying out-of-the-money call options on heavily shorted stocks; that could be what's happening here.
A year ago, it looked like Workhorse's C-Series electric delivery vans might be able to get some traction in the commercial-fleet market. But now, with both Ford and GM rushing their own electric vans to market, the C-Series' prospects -- and Workhorse's -- seem dim. Image source: Workhorse Group.
A call option gives the owner the right, but not the obligation, to buy shares at a set price. When a dealer sells a call option at a price well above the stock's current levels, the dealer will generally hedge the option by buying shares of the stock. If many investors buy the call options, as in a coordinated action, the volume of shares bought by dealers can be enough to push the stock's price sharply higher.
Add in the short-squeeze effect, and the price increase can be dramatic. That appears to be what's happening here.
Now what
I feel that I should remind investors that out here in the real world, the bull case for Workhorse is somewhere between thin and nonexistent. The company, which has struggled for years to find and act on a viable business model, recently began small-scale production of an electric package-delivery van.
A year ago, Workhorse's electric van seemed like an intriguing bet. But now, with both Ford Motor Company (F 1.44%) and General Motors (GM 0.21%) set to begin shipping electric commercial vans of their own before the end of the year, and with a potential U.S. Postal Service contract going to a rival, Workhorse's chances of gaining market traction (much less of delivering the "disruption" that Redditors once hoped for) seem slim. Trade this one carefully.
