Don’t Play the Ocugen Stock Short Squeeze Before You Read This Warning!

Remove yourself from the emotions of Ocugen (NASDAQ:OCGN) and it’s difficult to come away with the conclusion that OCGN stock is a reckless speculation. Some naysayers on social media have labeled it a garbage stock. While I’m not going to dive into pejoratives because my inbox is already full, I can appreciate the negative sentiment.

A needle rests on a reflective table next two clear glass vials of a clear liquid.
Source: Shutterstock

Prior to the novel coronavirus pandemic, Ocugen focused exclusively on addressing rare eye diseases. No one is callous enough to bad mouth the good intensions here. But the problem is that the company consistently failed to deliver encouraging results. Therefore, many investors gave up on OCGN stock, with the result being that it faced grave risks of implosion.

But the terrible pandemic was so far at least a blessing in disguise. With a partnership involving Bharat Biotech, Ocugen has rights to distribute the Indian biotech’s Covaxin vaccine in the North American market. Earlier, Ocugen attempted to acquire emergency use authorization (EUA) from the Food and Drug Administration. However, the FDA rejected the request, which naturally bodes poorly for OCGN stock.

As InvestorPlace contributor Larry Ramer mentioned, the bad news didn’t stop there. “First of all, Covaxin was found to have been 77.8% effective during its Phase 3 trials in India, while Pfizer’s (NYSE:PFE) vaccine was reportedly 88% effective against a key variant in India, and Moderna (NASDAQ:MRNA) over 90% efficacy against the Delta” variant, Ramer wrote.

Based on other technical concerns about the vaccine, Ramer declared emphatically that “There is virtually no chance that Covaxin will be approved by America’s FDA.” While I’m not going to guess what the regulatory agency will do, if it already rejected the EUA proposal, it’s hard to imagine Covaxin will receive full approval.

Unfavorable Risk-Reward Profile for OCGN Stock

Still, a major catalyst for OCGN stock is its enormous popularity with social media. And deliberate or not, such intense bullishness could lead to a short squeeze. Adding more intrigue to this thesis, there initially appears to be credible validity for this risky tactic.

Based on the latest read of short percentage of float (June 15, 2021), bears are targeting 25.5% of Ocugen’s float. While no hard and fast rules about this concept exists, typically, traders regard anything above 10% as significantly bearish. Above 25% and you’re talking about extremely negative sentiment for OCGN stock.

But before you join the contrarian bulls on this trade, you should also note that the number of days to cover the short position is only 0.7. Therefore, any bullish pop could be short lived as the bears have ample room to cover themselves based on average trading volume.

Further, it’s not entirely clear that going contrarian is the best move. Early on in this narrative, the short squeeze dramatically lifted shares. On Dec. 31, 2020, OCGN stock was up 516% from the prior read in trading metrics (Dec. 15). Then, on Feb. 12, 2021, OCGN gained nearly 481% from the prior read (Jan. 29).

OCGN stock short squeeze risk-reward profile
Click to Enlarge
Source: Chart by Josh Enomoto

But following that session, the short percentage of float began increasing significantly. This may have emboldened the bulls once more, resulting in yet another significant rally. But on the April 30 read, OCGN stock gained “only” 106%. Don’t get me wrong — that’s an impressive tally. However, note the trend here:

  • Dec. 31, 2020: Short percent was 9.5% while OCGN’s profit against the prior read was 516%.
  • Feb. 12, 2021: Short percent was 4.5% while OCGN’s profitability was 481%
  • April 30, 2021: Short percent was 19% while OCGN’s profitability was 106%.

Generally speaking, negativity in OCGN stock is rising while the rewards for going contrarian are progressively declining.

Not Quite the End for Ocugen

Now, a perma-bull looking at this development would likely reply that a higher short percentage of float would be beneficial for the upside price projection of OCGN stock. The more bears on the negative trade, the more profitability the bulls can steal from them.

Indeed, it’s possible that contrarian traders can extract the mother of all short squeezes from OCGN stock. At the same time, I’m not entirely convinced that it’s probable.

Again, the time to cover is less than one day. That basically translates to bears having more than enough room to run around and avoid catastrophic losses. Further, OCGN has now joined the Russell 3000 index, which means that any funds tracking the index must buy shares of OCGN. That explains part of its rise recently.

However, if the fundamentals for Ocugen don’t play out, its shares could fall in a hurry. In that case, the big funds won’t have a reason to hold onto it. Therefore, even on a narrative perspective, it appears the bears have the right idea.

If you’re dead set on buying OCGN stock, I won’t stop you. It’s your money. But you should know ahead of time that this is a very high-risk trade.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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