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Watch These 3 Short-Laden Stocks Leading Up To Earnings Announcements

Watch These 3 Short-Laden Stocks Leading Up To Earnings Announcements - Fitbit Inc NYSE:FIT, Square NYSE:SQ

The concept of a "catalyst" is extremely important when short trading because of the volatility it can cause. Catalysts give a reason for a stock to move in the desired direction and can include any number of events, including: earnings reports, FDA decisions, mergers, spinoffs, takeovers, institutional investor activity and management shake-ups.

With this in mind, here are three companies to keep in your watch list that are set to release their quarterly earnings results next week. These three stocks are particularly noteworthy because they all have short interest of more than 20 percent of their float. This is significant for a couple of reasons.

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First, these companies may see a rise in share price leading up to earnings disclosure as traders cover short positions. Earnings releases often cause stock volatility, and many traders don't want to risk being heavily short when earnings are reported.

Secondly, if earnings results are better than expected, these three stocks may see very sharp upside moves as traders scramble to buy back short shares they'd used to hedge risk.

3 In Focus

The mobile payments company is set to release its quarterly earnings results Wednesday after the closing bell. According to finviz.com, over 40 percent of Square's float has been sold short and the stock has a short ratio of 5.51. This means that based on the average daily trading volume, it would take around five and a half days for all of the shares that have been shorted to be bought back.

The short ratio is calculated by dividing the short interest by average daily volume. In recent days, Square has been rising sharply, possibly due to short covering ahead of next week's earnings report. Over the last five trading sessions, the stock is up around 7 percent, and over the last month, the share price has risen almost 14 percent.

The electric-car maker is set to release its quarterly results Wednesday after market close. Leading up to the release, there is a huge range of earnings estimates on Wall Street, from a loss of $1.03 per share to a profit of $0.26 per share. Analysts are predicting a 36 percent sales increase. Tesla has always been a heavily shorted stock despite its huge run-up in recent years.

Heading into Wednesday, however, about 27 percent of the float is short with a short ratio of 6.48. This could be a catalyst for significant gains if the company delivers meaningful upside to current expectations. Tesla rose about 5 percent over the past five days, and over the last month, it climbed 14 percent.

The wearable fitness-monitor maker will release its quarterly results on Tuesday after market close. Wall Street expects sales growth of plus 44 percent and earnings per share of $0.11. Like Square and Tesla, Fitbit's stock has been running up in recent days pre-earnings release.

Over the previous five trading sessions, the stock has jumped 6 percent and Fitbit has registered a gain of more than 13 percent over the last month. Currently, nearly 58 percent of the stock's float has been sold short according to finviz.com, setting the table for a major short-squeeze if the company's results surprise to the upside.

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