With new regulation against naked shorting, the number one nakedly shorted stock is a prime canditate for a short squeeze. Smart traders will appreciate the opportunities.

Two business channels (Fox and CNBC) reported new, and rather immediate regulations against naked shorting (selling shares one doesn’t own, and hasn’t even borrowed, basically flooding the market with non-existing shares).

We have no connections to the regulatory process, but we think those reports have a pretty high probability. If so, and depending on the shape of the new regulations, InterOil can only benefit.

From the few details that the CNBC story contained it shows:

• Delivery upon settlement day (3 days after selling short).
• We wonder whether the same rule will apply to options market makers though
• It is a criminal offence to lie about one’s intention to borrow or the availability of shares to short

It’s a little soon for definite conclusions, but this kind of stuff is positive, potentially very positive for InterOil.

With the shorters capabilities to short diminished, big funds and traders might very well sense a trading opportunity and force the shorts to cover. Something like that happened last year, when InterOil’s shares went to $45.

So far, the shares are off to a pretty good start. With lots of news pending between now and the end of the year, and with downside risk greatly diminished by the turn-around in the refinery and the second monster well find, we have no reason to change our opinion that these shares offer one of the most attractive opportunities in the markets today.

Note also that volume on updays is way higher than volume on down days, also a positive sign.