Last week, cybersecurity provider Palo Alto Networks (NSDQ: PANW) was promoted to the S&P 500 Index. Palo Alto Networks will supplant Dish Networks (NSDQ: DISH), which is being demoted to the S&P SmallCap 600 Index.

That begs the question: “Would a company rather be the smallest company in a large-cap index or the biggest company in a small-cap index?”

From an investment perspective, there is considerably more value in being part of the large-cap index. That’s because the S&P 500 Index is by far the most widely tracked stock market index in the world.

That means every mutual fund and all other investment vehicles that track the movement of the index most own every stock in the index. On the day PANW was included in the index, it jumped more than 4% which added about $3 billion to its stock market valuation.

And since there is so much money tracking the index, every Wall Street firm has a team of analysts that cover every company in the index. That means Palo Alto Networks might be recommended to that firm’s clients by those analysts if they like what they see.

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As more clients buy the stock, its market cap increases thereby requiring all the funds that track the index to buy more of that stock. It’s a virtuous circle that can drive a stock’s share price to unimaginable heights during a bull market.

Endangered Species

That’s the good news. The bad news is the same process can also work in reverse. As a stock in the index loses value, the funds that own it must sell shares to maintain proper balance in their portfolios.

You need look no further than the company Palo Alto Networks replaced in the index to see what that looks like. Since the start of this year, DISH has lost half its value.

To be sure, the problems besetting DISH Networks are mostly of its own making. Its fiscal 2023 Q1 sales were 10% lower than the year prior.

Its diluted earnings per share did even worse. Last year’s result of 68 cents was far above this year’s showing of 35 cents.

Sales and profits are dropping because its subscriber base is shrinking. The company lost 552,000 Pay-TV customers during the quarter. That’s more than last year’s first quarter decline of 462,000!

In short, DISH Networks finds itself in a precarious position. More people are consuming visual media over the internet. They no longer need an unsightly satellite dish clinging to the side of their homes like a koala during a typhoon.

There is a lot of so-called “smart money” betting on DISH to keep going down. Last week, short interest in the stock (as a percentage of the float) was 26%.

Short interest above 10% is considered a warning that a company may be in trouble. Short interest above 25% suggests that a company could be headed for bankruptcy.

However, there is one more data point that the short sellers may want to consider. Nearly all of DISH Network’s float (shares actively trading on an exchange) is held by institutional investors.

This Means War

There are two things I can tell you about institutional investors: (1) they don’t like losing money, and (2) they hate short sellers.

I think a war between DISH Network’s institutional shareholders and its short sellers is about to break out. The winner stands to make a lot of money while the loser could get soaked.

The options market is already pricing in such a scenario. Last week while DISH was trading near $7, the call option that expires on September 15 at the $7.50 strike price was selling for $1.35.

A call option increases in value when the price of the underlying security goes up. That means DISH must rise above $8.85 within the next three months for that trade to be profitable.

At the same time, the put option that expires on the same day and at the same price was selling for $1.65 (a put option increases in value when the price of the underlying security goes down). For that trade to be profitable, DISH must fall below $5.85.

Buying both options would cost $3. In that case, DISH must either fall below $4.50 or rise above $10.50 for that trade to be profitable.

That type of options strategy is known as a long straddle. It’s a bet that DISH is about to make a big move one way or the other.

This type of trade is aggressive and has a high risk of loss. It is not suitable for most investors. But for those that have some speculative capital to play with, this trade could end up being a sweet dish!

Editor’s Note: Jim Pearce just gave you invaluable investing advice. I also suggest you consider the expertise of our colleague Robert Rapier. As chief investment strategist of Rapier’s Income Accelerator, Robert has developed strategies that make money in bull or bear markets.

Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.