Shorts hedge their bets ahead of FuelCell Energy's 4Q report

The stock's technical performance is less impressive. FCEL has shed 11.3% year-to-date, and the stock is currently facing resistance from its 10-week moving average, as well as the $3.50 level. The shares haven't finished a single week above these technical roadblocks since mid-October.

As a result, short sellers have bombarded the equity. The number of FCEL shares sold short jumped by 7.5% during the past month, and these bearish bets now account for a healthy 7.9% of the stock's float. At the equity's average daily trading volume, it would take 12 days for all of these shorted shares to be repurchased.

However, FCEL's looming earnings report seems to have sparked some anxiety among the shorts. During the past 10 days, option traders on the International Securities Exchange (ISE) have bought to open 18.11 calls for every put on the security. This ratio arrives in the 85th percentile of its annual range, suggesting that calls have rarely been purchased over puts at a faster pace.

In other words, it looks like short sellers are hedging their bets by purchasing calls on FCEL. By doing so, pessimistic players can limit their losses in the event of a post-earnings pop.

This is a smart move on a stock that sports such a hefty accumulation of short interest; with so much cash piled up on the sidelines, FCEL could enjoy a drastic rally in the event of a stronger-than-expected report. However, with multiple layers of technical resistance lingering overhead, any post-earnings upside could be limited.

Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.