Speculators on Whole Foods pared shorts in recent months, saving themselves some pain after Amazon's purchase of the company sent shares soaring on Friday.
It could've been a whole lot worse.
In the two months leading up to Amazon's $13.7 billion acquisition of Whole Foods, traders speculating on share declines in the high-end grocer cut their bets against the stock by more than half, according to data compiled by IHS Markit Ltd.
So when Whole Foods' surged as much as 28% following the news on Friday, the damage was relatively controlled, at least compared to the catastrophic short squeeze that would've occurred had short positions not been pared.
The decline in short interest on Whole Foods started in April, after activist investor Jana Partners took an 8% stake in the grocer and pushed the company to look into strategic options, including a sale.
"After the Jana investment, people were expecting something to happen," Simon Colvin, an equity and credit markets analyst at data provider IHS Markit, told Business Insider by phone. "People are cognizant of the fact that when a story is getting bad, but there could be a strategic case, a company can get taken over for a significant premium."
And that's exactly what happened. The $42 a share all-cash acquisition marked a 27% premium on Whole Foods' closing price on Thursday.
But that's not to say that short sellers are pain-free. Colvin estimates that the remaining bearish speculators — which still hold roughly 6% of the company's shares outstanding on loan — are taking a $200 million hit on the stock spike.
"Don't get me wrong, it's still a painful short," he said. "But it could've been a lot worse."