Short Squeeze Potential in Applied Optoelectronics: A Contrarian Investment Signal

Short interest dynamics have long served as a barometer for market sentiment, offering contrarian investors a unique lens to identify potential opportunities. For Applied Optoelectronics Inc. (NASDAQ: AAOI), the interplay between short interest, price volatility, and historical precedents suggests a compelling case for a short squeeze-driven strategy. This analysis explores the current state of AAOI's short interest, contextualizes it within broader market behavior, and evaluates its implications for contrarian investors.

AAOI's Short Interest: A Contrarian Indicator

As of November 2025, AAOI's short interest stands at approximately 12.22–12.88 million shares, representing 18.54% to 21.91% of its public float, depending on the data source. This figure reflects a 3.48% decline from the previous month, signaling a potential shift in bearish sentiment. The short interest ratio, or "days to cover," is estimated between 1.897 and 2.55 days, indicating that short sellers could exhaust their coverage in just a few trading sessions if the stock price rises sharply.

A declining short interest often correlates with improving market confidence, as short sellers reduce their bets against a stock. However, the persistence of a relatively high short float-over 18% of the float-suggests lingering skepticism among institutional and retail investors. This duality creates a fertile ground for a short squeeze, where upward price momentum forces short sellers to buy shares to limit losses, potentially amplifying the stock's ascent.

Historical Precedents: Lessons from Short Squeezes

Contrarian strategies leveraging short squeezes have historically yielded outsized returns, albeit with significant risks. The 2021 GameStop (GME) short squeeze, for instance, saw the stock surge over 1,700% as coordinated retail investor activity overwhelmed institutional short sellers. While AAOI lacks the social media-driven fervor of GME, its short interest profile shares structural similarities: a high percentage of float sold short and a low days-to-cover ratio.

Warren Buffett's 1963 investment in American Express during the Salad Oil scandal offers another instructive example. Amid panic selling, Buffett identified undervaluation and long-term potential, reaping substantial gains as the market corrected. Similarly, contrarian investors in AAOI might argue that the stock's recent volatility-swinging from $19.49 to $26.68 in November 2025-reflects overreaction rather than fundamental weakness.

AAOI's Market Dynamics: Volatility and Sentiment

AAOI's stock has exhibited pronounced price swings, with daily trading volumes fluctuating significantly. This volatility, coupled with a short borrow fee rate of 0.60% as of September 2025, suggests that short sellers are paying a premium to borrow shares, potentially indicating a race to cover positions before further price escalation.

The interplay between short interest and price action is critical. A sharp rise in AAOI's stock price could trigger a self-reinforcing cycle: short sellers buying to cover, driving demand higher, and attracting momentum traders. However, such scenarios depend on broader market conditions and the company's fundamentals. AAOI's business performance-particularly in its optical communication and industrial laser segments-must be evaluated to determine whether the price action is driven by technical factors or underlying value.

Risks and Considerations for Contrarian Investors

While short interest metrics present a compelling narrative, investors must remain cautious. AAOI's short float, though elevated, is not as extreme as GME's pre-2021 levels. Additionally, the days-to-cover ratio is relatively low, implying that a short squeeze, if it occurs, may be brief and less impactful than historical examples.

Behavioral biases also play a role. The disposition effect-selling winners too early and holding losers too long-can distort market reactions to news, creating temporary mispricings. Contrarian investors must distinguish between such anomalies and genuine value opportunities. For AAOI, this means scrutinizing earnings reports, industry trends, and macroeconomic factors that could influence the stock's trajectory.

Conclusion: A Calculated Contrarian Play

AAOI's short interest dynamics, when viewed through the lens of historical case studies, suggest a potential contrarian opportunity. The declining short interest, coupled with a low days-to-cover ratio, positions the stock as a candidate for a short squeeze should bullish momentum materialize. However, success hinges on a nuanced understanding of market psychology and the company's fundamentals.

For investors willing to navigate the risks, AAOI exemplifies how short interest data can inform strategic decisions. As always, due diligence and a clear risk management framework are essential to turning contrarian insights into profitable outcomes.