While the U.S. economy may be headed toward a period of stagflation, the one sector that continues to not receive the memo is technology; specifically artificial intelligence. Just when you thought that the generative AI boom was losing its charm — particularly from the disappointing response to Nvidia Corp NVDA and its latest earnings report — individual players in the machine learning space have fought back. One name to watch closely is BigBear.ai Holdings Inc BBAI.
On paper, BigBear.ai appeals to investors because of its focus on high-stakes decision environments. Fundamentally, the company forwards solutions tied to decision intelligence, which uses AI, data fusion, sensor networks and other innovations to help organizations make faster, superior decisions — especially under pressure. As such, BigBear.ai’s platform offers significant relevance for both commercial and governmental applications.
Of course, I would be remiss to not mention what might really be attracting investors — the BBAI stock price. At time of writing, the security is attempting to march toward the $7 level. That means it’s really not that far removed from what many traders would consider penny-stock territory. What’s more, purely objective investors would likely declare that BigBear.ai’s fundamentals are poor. For example, its quarterly disclosures consistently miss expectations.
So, why does it appear that everyone’s gaga over BBAI stock? If the stars align, it could be the next Palantir Technologies Inc PLTR.
It’s not just an empty opinion. Goldman Sachs’ regulatory filings revealed that the banking juggernaut had increased its holdings of BBAI stock by 569% during the first quarter. It now owns over 2.3 million shares worth about $6.7 million.
Enticingly, there’s a case to be made that this value could rise much higher.
BBAI Stock Sets Up A Compelling Showdown
One of the commonly cited statistics of BigBear.ai is that the company has likely attracted a number of pessimistic speculators. Notably, the short interest of BBAI stock stands at 19.8% of its float. To be clear, there is no one metric that defines whether a security suffers from excessively elevated short interest. However, Charles Schwab states that a threshold of 10% or higher may be a warning sign.
Further, the financial institution points out that securities with short interest of 20% or higher would be on the more elevated end of the spectrum.
Now, short interest is an often-misunderstood topic. To really appreciate what’s going on, a true short position must be recognized as a credit-based transaction. Shorting a stock means that the speculator is selling the target security to open a bearish position, with the ultimate hope that it falls in value. If it does, the short trader can buy back the deflated shares on a relative discount and return them to the lending broker.
However, because the securities that were sold to initiate the short position were borrowed on credit, the broker must be made whole — irrespective of whatever happens to the stock price. Put another way, a short trade can be very lucrative, so long as the stock falls. If it goes the other way, a panic erupts because the shorts must now exit their position.
By logical deduction, a short position can only be exited by buying to close. That’s where the upside pressure from a short squeeze comes into play.
Admittedly, just because BBAI stock has high short interest doesn’t necessarily mean that this ratio is 100% allocated to bearish bets. Some of it could simply be hedged transactions.
Still, what’s fascinating is that since July 2023, the correlation coefficient between BBAI stock and its price action clocks in at 80.73%. As the short interest has moved up, the security has marched higher — albeit in a choppy manner. It may not be a causal relationship but it’s potentially setting up a showdown between the bulls and bears.
A Bull Sees Red
Interestingly, as short interest is rising, BBAI stock appears to be printing a technical pattern known as the bullish pennant. Under the technical discipline, buyers and sellers engage in heated battle until the frontline stagnates, resulting in a triangular geometry. At the focal point, technical analysts believe that there is a higher probability of a breakout move.
To be blunt, it’s a heuristic argument, taking into account what other traders might do. But in the case of BBAI stock, it might not be an empty declaration because of the elevated short interest. Since short interest stems from a credit-based transaction, the creditor must be made whole — irrespective of the intent of the trader initiating the short position.
As such, I see an explosive move happening, with a longer-term target of $10. When that might happen, though, is the difficult part to figure out.
Personally, I would consider a staggered strategy, first by securing a position in the open market. This way, you don’t have to deal with options and their expiration dates.
As for an options-focused trade, I’m tempted by the $7 call expiring March 20, 2026. At time of writing, the ask is $1.80, while the bid-ask spread as represented by the midpoint is 2.81%. Essentially, this means you’re paying 2.8 cents per dollar of option premium to cross the spread, which is quite tight for a speculative entity like BBAI stock.
For those who are dead-set on a vertical spread, the 6.50/7.50 bull call spread expiring Oct. 31 may be intriguing. A capped-risk, capped-reward trade, this geometry will require BBAI stock to rise through the $7.50 price level at expiration. If it does, the payout stands at a tempting 150%.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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