Low float stocks can be some of the most volatile stocks in the market. If you mix in a short squeeze, the potential short-term gains in a low float stock can be extreme.

A stock's float is the number of shares that trade freely on the public market. Because insiders and institutional investors don’t typically trade their shares on a daily basis, those shares don’t typically contribute to a stock's near-term liquidity. Float is the number of shares that remain after accounting for insider and institutional ownership.

Why Is It Important? When a stock gains positive momentum in the market, momentum buyers can rush in all at once. If a stock has a high short interest, the short covering can quickly ramp up demand for shares, triggering a short squeeze. Since low float stocks have relatively few shares trading freely, a major imbalance in supply and demand can serve as rocket fuel for share price.

Buying a low float stock with high short interest isn’t a guarantee of a short squeeze. There still typically needs to be some form of catalyst to get the stock moving in the first place. However, traders can keep an eye on these stocks for any signs of life to try to catch most of a potential big move.

Short Squeeze Candidates: Here are three energy sector stocks that have all the ingredients for a major short squeeze.

HighPoint Resources Corp (NYSE: HPR)

HighPoint Resources is an independent oil & gas company. In the past three years, the stock has collapsed by 97.9%. But as many meme stock traders have realized in 2021, short squeezes are technical market phenomena and don’t necessarily have anything to do with the company’s underlying business fundamentals or the stock’s long-term outlook.

With a float of just 2.28 million shares and a short percent of float of 31.8%, HighPoint is one of the best short squeeze candidates in the entire energy sector.

Arch Resources Inc (NYSE: ARCH)

Arch Resources produces and sells coal. Coal may be a dying industry, but short squeezes can send even the worst stocks soaring in the blink of an eye.

With a float of just 15 million shares and a short percent of a float of 22%, Arch Resources has plenty of short squeeze rocket fuel in its tank.

Ring Energy Inc (NYSE: REI)

Ring Energy is an oil & gas exploration and production company that operates in the Permian Basin, the Central Basin Platform, and the Delaware Basin.

Ring Energy’s 57.5 million-share float is not the minuscule float that’s ideal for a short squeeze. However, 21.5% of its float is held short. In addition, short squeeze traders have frequently targeted stocks trading under $5 per share this year, and Ring currently trades at just $2.79.