BigBear.ai Holdings, Inc. ( BBAI ) is trading higher Monday. The stock has been very volatile this year. One reason for this is because it is a highly shorted stock.

This makes it susceptible to going into a short squeeze, which is why BigBear is our Stock of the Day.

Short sellers believe a stock will head lower. They borrow shares from someone and sell them. The idea is that the stock will be lower in the future. They plan on repurchasing the shares, returning them, and keeping the difference.

Short interest is the percentage of shares that short sellers have borrowed. Every stock has short interest. It is typically in the single digits.

The current short interest of BigBear is 21.5%. This is extremely high and makes the stock susceptible to a short squeeze.

Short squeezes occur when a stock moves higher. As the price rises, the short sellers' losses grow. This gets them nervous and they go into the market to buy back the stock they shorted.

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This pushes the price higher, which gets other short sellers nervous. They start to buy back their shares, and this adds to the upward pressure.

Eventually, there is a panic as the losses grow. A bidding war breaks out among the short sellers, and the stock rallies even more.

At this point, the people who loaned their shares to the short sellers see how high the price is, and decide to sell.

The shorts are forced to buy back the shares so they can return them regardless of the price. This causes the stock to go even higher.

As you can see on the chart, there have been two short squeezes in BigBear this year. The first drove the stock up by about 125%, and the second by 95%.

When a short squeeze ends, the stock can drop right back to where it was when the squeeze started. Holders of BigBear may have to deal with extreme volatility. But with this volatility comes opportunities to profit.

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