Let’s get something straight right away: Rent the Runway (RENT) is not what you consider a reasonable speculative investment. You know what I consider a reasonable wager? A solid company that is tied to a burgeoning industry that just fell under hard times. Also, if a security didn’t fall more than 85% over the past 52 weeks, that would be another factor to consider.
Unfortunately, that’s not the case with RENT stock. Not only did it collapse in 2023, since its public market debut in October 2021, the company lost nearly 97% of its equity value. Granted, Rent the Runway offers a creative e-commerce platform, allowing users to rent, subscribe to or buy designer apparel and accessories. However, the reality is that the business model failed to resonate with investors.
Nevertheless, that doesn’t mean that RENT stock lost all utility. Sure, the Barchart Technical Opinion indicator pegs shares as an 88% strong sell. That’s almost about as ugly as you can get. At the same time, analysts rate shares as a consensus strong buy, breaking down as six strong buys and two holds. What’s more, the mean expert target calls for a price of $2.29 per share.
So, who has it right? Frankly, this is one of those cases where both sides offer perfectly legitimate arguments. Again, when a security loses 85% of value, there’s a reason for it – and usually not a good one. On the flipside, you have to be careful about the bounce-back effect.
Consider baseball. You might be winning but let’s say that a few bad pitches led to runners in scoring position. Also, adding to the pressure, your pitcher found himself in a hitter’s count. Good going. Now things can get spicy, which may be what happens with Rent the Runway stock.
RENT Stock Faces the Prospect of a Double Squeeze
To understand the thesis behind RENT stock, one must consider the concept of squeezing out the bears. Generally speaking, pessimistic traders can be forced out of their positions in two mediums: first, in the open market (commonly referred to as a short squeeze) and second in the options market, usually due to the panic associated with soon-to-be exercised sold calls.
In both scenarios, the bearish trader seeks to mitigate losses before they become uncapped. In a short squeeze, bearish traders are directly shorting securities. In the case of RENT stock, they borrow RENT, sell it immediately and hope that it falls lower. If it does, they can scoop up RENT at the lower price, return the borrowed number of shares back to the lender (broker) and they pocket the difference (profit).
In the options market, you’re dealing with derivative contracts. Here, the bearish trader sells call options; that is, they underwrite the risk that a security will not materially rise above the listed strike price of the contract. If RENT stock goes sideways or falls, the premium (proceeds from the sale of the call options) collected represents their profit.
Obviously, both actions carry risks. For short trading in the open market, if the security rises instead of falls, the bear is still obligated to return the borrowed shares to the broker. Therefore, instead of pocketing a profit, they incur a loss. Same thing with the call option seller. If the stock rises, the underwriter must sell the contracted amount of shares to the exercising call holder.
If the underwriter did not have the shares prior to initiating the call option sale (uncovered call), they must buy back the security in the open market, only to sell it to the call holder at the (lower) strike price. It’s a messed up situation if things go wrong for the bears.
And things might go wrong for the bears. Currently, the short interest of RENT stock is 16.64% of its float while the short interest ratio comes in at 4.97 days to cover (or the number of days required for the bears to unwind all their short positions). On the options side, most of the unusual volume sparked on Monday stemmed from the Jan 19 ’24 1.00 Call. These calls will expire Friday of next week.
Per Fintel, an institutional trader (or traders) appears to have bought 7,944 contracts of the aforementioned call option. However, Fintel also shows that an institutional trader likely sold those contracts, setting up a compelling bull-bear showdown.
Speculative Dynamics Seem to Favor the Bulls
Now, it’s very difficult to know what will happen with RENT stock. After all, we’re dealing with a security priced at 56 cents. However, it should be noted that on Monday, RENT gained 23% of market value. And that sentiment came out of nowhere during the afternoon hours.
Moving forward, bearish traders have some soul-searching to do. It’s unlikely that RENT stock will fly to $1 in less than two weeks’ time. However, if it starts moving toward that direction, several bearish positions may find themselves exposed, both in the open market and in the options market.
Because the bearish traders involve short trading and short (sold) calls, an obligation of fulfillment exists. That is, if the bullish investors get things wrong, their losses are limited to their principal only. However, if the bears made the improper move, they have an obligation to fulfill certain agreements (i.e. return borrowed shares or execute the terms of call option contracts).
That almost certainly means the pessimists are feeling the pressure. And after RENT stock having dropped so much, it’s not impossible for it to at least perform a dead-cat bounce. If you’re not going to speculate, you can at least grab your popcorn for an excellent show.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
