A short squeeze could also push the biotech name higher
Verastem Inc (NASDAQ:VSTM) capped off an impressive summer by shooting to a three-year high of $10.35 on Tuesday. Since then, the biotech name has cooled off -- but this pullback could have bullish implications for VSTM, if history is any guide.
More specifically, Verastem stock is now within one standard deviation of its 40-day moving average, after a lengthy stretch above it. Over the past three years, there have been two other instances of VSTM pulling back to its 40-day trendline after trading north of it at least 60% of the time over the previous two months. Those two pullbacks have resulted in an average one-month return of 25.40%, per Schaeffer's Senior Quantitative Analyst White, with both returns positive.
Based on its current perch at $9.14, up 3% for the day, another move of this magnitude would put the equity above $11 by this time next month for the first time since March 2015. Although VSTM is set to snap a five-week winning streak, the shares have more than tripled off their April 3 lows at $2.77, thanks in part to upbeat results from its blood cancer drug that resulted in a mid-June bull gap.
As shorts head for the exits, a short squeeze could also help fuel the security's rise. After hitting a high of 8.40 million shares on July 15, short interest fell by 28.4% in the two most recent reporting periods. However, a hefty 16.3% of VSTM's total available float remains in the hands of short sellers.
In the options pits, there are currently 25,936 calls and 9,205 puts open -- putting total open interest in the 100th percentile of its annual range. Most of this centers on the September 10 call, home to peak open interest of 5,296 contracts.
For anyone considering speculating with options, now is seemingly a good time to do it. The stock has a Schaeffer's Volatility Index (SVI) of 104%, ranking in just the 3rd annual percentile. This reveals that unusually low volatility expectations are being priced into short-term options for the drug stock.