Enphase Energy, Inc. (NASDAQ:ENPH) shares are consolidating on Thursday. They have gained about 130% since May 1.

Enphase is in a short-squeeze. When short squeezes end, the stocks can drop back to the same level they started at. This is why Enphase Energy is the Stock of the Day.

People who sell a stock short believe that it will go lower. They borrow the shares from other investors and sell them.

Their plan is to buy them back at a lower price in the future, return them, and keep the difference.

Short squeezes occur when a heavily shorted stock begins to move higher. As this happens, the short sellers begin to lose money because they will have to buy the shares back at a higher price than they were sold for.

As the price rises, the losses increase. Sometimes it results in panic buying as short sellers outbid each other. It can result in a snowball effect that pushes the price rapidly higher.

The climax of a short squeeze comes when the people who lent the shares to short sellers see how much the price has risen and decide to sell.

The short-sellers are forced to buy the shares regardless of the price so they can return them. They have no choice. It is a legal obligation.

This can result in the shares going parabolic.

Enphase is a heavily shorted stock. About 33% of the shares that are outstanding have been borrowed. This is an extremely high number. Every stock has short interest, but it is usually only a couple of percent.

When short squeezes end, there is a chance the stock goes into a steep decline. Sometimes they even end up back to where they were when the squeeze started.

Traders and investors who trade options can profit when a stock moves lower. They can buy put options. Their value will increase as the price declines.

There is no way to know when the short-squeeze in Enphase will end. But when it does, it may present profit opportunities for savvy traders.

Photo: Piotr Swat from Shutterstock