Amylyx Pharmaceuticals: Top Short Squeeze Candidate For September

The best short squeezes aren't necessarily the ones with the highest short interest, but the ones that completely catch shorts by surprise. This is the case for AMLX. The company's drug AMX0035 is for the treatment of ALS, best known as Lou Gehrig's disease. Last week the drug got a 7 to 2 recommendation in favor of approval by the FDA's panel. With the PDUFA coming up on September 29, things are looking up for AMLX as the FDA generally votes in favor of panel recommendations.

What makes this event a particular hit to shorts is that it came as a complete surprise. The recommendation by the committee is a reversal of opinion from the ruling in March. The stock actually tanked 23% on September 2 after initial FDA briefing documents pointed to a negative outcome. Short interest has been steadily rising over the last several months, and hit 3.4 million as of August 15. However, based on the price performance of September 2, this short interest has almost certainly continued to grow. 

AMLX has 58.5 million shares outstanding and a 24.3 million float, so 3.4 million in shorts is a healthy 14% short interest. Not the highest number for a short squeeze, but this is more about quality than quantity.

April 14th is the key date. This is where shorts leveled out at just under 2 million while the stock price was around $12. It hit a low of $6.51 on May 12. That's when you would think that smart shorts would cover and take their profits, but short interest actually increased to 2.6 million by May 13. Shorts have shorted the stock near the 52-week low. Short interest hit its peak at 3.7 million on July 15, when the stock was trading around $20. It's fair to say that the average short has a cost basis of about $15 and is losing around 100% right now. Some shorts have churned out while others have taken their place, but all short interest is at a significantly lower level than today's stock price. Shorts are angry and are filling social media and the Fintwit community with posts suggesting that AMLX won't get approval for its ALS drug. This is ludicrous to suggest that these outsiders know better than the FDA committee, but that's the level of desperation they have right now. 

Shorts are caught off guard in an awful losing position. Not only that, the meeting on September 29 will be a positive catalyst that should spark more buying on hype leading up to that date which will only accelerate short covering. 

The final piece of this puzzle is the open interest on the options. Presented below is a screen shot of options expiring this week and in October, both immediately proceeding and following the PDUFA date. 

For September, 4,676 contracts with a strike price between $17.50 and $25 are now in-the-money. This locks up 467,600 shares in gamma hedging strategies for call option writers. But the big opportunity lies just ahead. There are 5,540 contracts at the $30 strike and 8,701 more up to $40. October has 4,650 in open interest between $17.50 and $25, and 19,818 in open interest between the $30 and $40 strikes. 

The potential impact of all short and open call option interest over the next two strikes as a percentage of the float is summarized in this chart below:

So while short interest is only 14%, an additional 5% in shares could be locked up in gamma hedging strategies thanks to in-the-money calls. Especially those in the $17.50 to $25 strikes that recently went deep in the money. Another 14% could be locked in gamma hedging strategies up to $40, with the $30 strikes toggling between being in and out of the money as we speak.

AMLX makes the ideal short squeeze candidate. Despite the big move recently, hardly anyone is talking about it on the Reddit forums and other social media outlets. It has a clear near-term positive catalyst in the PDUFA coming up in two weeks. Unlike so many other popular short squeeze candidate stocks, AMLX's shorts are actually deeply underwater. There is so much talk of short squeeze on stocks that have tanked from $20 to $5. If shorts are in at $20, you're not going to be able to squeeze them at $5. They are up 75%. Shorts that are in at $15 or $20 or $25 on AMLX will be forced to cover at $30, $35 or $40 soon enough.