How A Short Squeeze Works


This phenomenon creates a constant spiral effect of buyers purchasing ABC stock because of its good performance and short sellers purchasing ABC stock to exit the position and cut their losses. The result in this example is a short squeeze, or a rapid increase in ABC stock that causes short sellers to get squeezed out of their positions. During the 2008 financial crisis, Porsche Automobile Holding SE , already a major holder of Volkswagen AG shares, increased its total stake in Volkswagen to about 75%.

price rise


Block Jewel

As the’s price continues to rise, more short sellers are gradually squeezed out of their market positions. As noted, short sellers open positions on stocks that they believe will decline in price. However sound their reasoning, a positive news story, a product announcement, or an earnings beat that excites the interest of buyers can upend this. It should be noted that the same mechanics can also be applied in reverse to cause a ‘long squeeze’. In this case, a large downward price movement liquidates leveraged longs and triggers a stop-loss cascade — resulting in further sell pressure. As longs are forced out of their positions and traders manually exit to avoid further losses, this can result in a runaway crash that is completely uncorrelated with the prevailing market sentiment.

Web Trader platform pressure, when it comes to stocks, can mean a multitude of things. However, a sudden pressure or increase in the number of shares bought can also lead to a short squeeze. It’s important to note that buying pressure alone may not be a substantial indicator that a short squeeze will occur, but it may be used in support of other indicators.

  • One big risk is when bullish news pushes the stock price higher, prompting short sellers to “head for the exits” all at once.
  • A squeeze can be of great benefit to those traders who hold so called long-positions.
  • A referral to a stock or commodity is not an indication to buy or sell that stock or commodity.
  • A few investors believe they will lose money if the stock continues to rise and then decide to close their positions.

Most stock market participants invest using buy-and-hold strategies, aiming to identify strong companies with bright, long-term futures. A bear squeeze is a situation where sellers are forced to cover their positions as prices suddenly ratchet higher, adding to the bullish momentum. Short, or shorting, refers to selling a security first and buying it back later, with anticipation that the price will drop and a profit can be made.

Should You Participate in a Short Squeeze?

This buying may proceed automatically, for example if the short sellers had previously placed stop-loss orders with their brokers to prepare for this possibility. Alternatively, short sellers simply deciding to cut their losses and get out can cause a squeeze. Short squeezes can also occur when the demand from short sellers outweighs the supply of shares to borrow, which results in the failure of borrow requests from prime brokers. This sometimes happens with companies that are on the verge of filing for bankruptcy. SIR is a comparison of short interest to average daily trading volume. It represents the theoretical number of days, given average trading volume, short-sellers would need to exit their positions.

Automatic closing of short positions again increases the volume of purchases. In early 2020, over 18% of Tesla shares were in short positions. At odds with the more than 400% rise the share price had seen over the last few months. Since then, in the aftermath of the GME saga, more retail investors attempted to anticipate the next upcoming short squeeze by examining the companies that hedge funds were actively shorting.

Fewer short shares could mean that the price has risen too high too quickly, or that the short sellers are leaving the stock because it has become too stable. The only difference is that instead of the price dropping, it increases. Mostly, short selling falls under margin trading where the trader borrows a cryptocurrency, sells, buys back at a lower price, pays a commission, and keeps the profit. When one is caught up in a short squeeze, they end up making losses.

Unfortunately, instead of the price falling, it increases to $12,000. The time to return the borrowed funds is due and Bitcoin’s price is now at $12,500, with no sign of dropping. This means that you’re in a squeeze; you either buy back at $12,500 or wait to buy later at an even higher price. A short squeeze is usually triggered by a large buy event which instigates cascading liquidations. They are particularly worrisome for short sellers with positions open on illiquid exchanges or platforms with an abundance of highly leveraged traders, since these markets are easier to manipulate.

stock market

The GME originally began as a meme stock, or a stock that gained cult status on social media, but it quickly blew up far beyond what anyone predicted. Retail investors bought stock and call options, and as the price increased, more short sellers from hedge funds were driven out. There are many moving factors in the stock market that influence whether a stock’s price goes up, down, or stays steady. One reason a stock price rises far beyond what’s anticipated is a short squeeze. The term “short squeeze” refers to the pressure short sellers face to cover their positions following a sharp price increase in a stock they purchased. This caused panic among the short sellers, who now realized that a very limited number of shares were available to close out their positions.

The artificially and impossibly high borrowing ratio was crucial here. This is also called naked shorting and even riskier than shorting. Gamestop’s stock was at $17 before the short squeeze and at its peak at $500. The shorters from the hedge fund Melvin Capital lost around $6 billion and put a stop to the fund a year later. It was a Robin Hood like story of ordinary folks punishing greedy Wall Street for wanting to bring down a likeable brand. A short squeeze is the term to describe a rapid rise in price that forces traders who have shorted a security to buy at a loss.

Defining a Short Squeeze

You should consider whether you understand how these products work and whether you can afford to take the high risk of losing your money. In January 2021, US videogame retailer GameStop was in a terminal decline. While the retailer had struggled for several years, the pandemic seemed to be the final nail in the coffin. Traders were so confident that this company was going under that they, at one point in time, had 140% of its shares shorted.

examples of short

GameStop Corp. , due to a rise in competition and decline in foot traffic at malls, became a target of short sellers. The short interest had grown to more than 100% of the shares outstanding. Then a bull case for the company—that it could return to profit in a couple of years—started getting around in early 2021. In addition, big investors, such as Scion Asset Management’s Michael Burry and Chewy co-founder Ryan Cohen, also took a long position. Contrarian investors may buy stocks with heavy short interest to exploit the potential for a short squeeze. A rapid rise in the stock price is attractive, but it is not without risks.

There are many different ways to find potential short squeeze opportunities, but there are a handful of things you can do to narrow down the potential short squeeze trades. Typically, there are huge higher impulses followed by short-term sideways action. Once you see the market going sideways, you may be reaching the end of the short squeeze. If your research and trade setup leads to a positive move, you must keep track of the short squeeze. Remember that trading a short squeeze is not a set-and-forget strategy.

Check out this step-by-step guide to learn how to scan for the best momentum stocks every day with Scanz. Follow this step-by-step guide to learn how to scan for hot stocks on the move. Here’s how you can use Scanz to find the top movers every single day.

Why They Happen

Days to cover, also known as the short interest ratio, is calculated by taking a stock’s total number of shares sold short and dividing that number by the stock’s average daily trading volume. For example, if a stock has 1 million shares sold short and its average daily trading volume is 100,000 shares, then the days to cover would be 10 days. That is, it would take 10 days for short sellers to cover their entire short position based on the average daily volume of shares traded.

By the end of business on May 7, 1901, the two parties controlled over 94% of outstanding Northern Pacific shares. The resulting runup in share price was accompanied by frenetic short selling of Northern Pacific by third parties. On May 8, it became apparent that uncommitted NP shares were insufficient to cover the outstanding short positions, and that neither Hill/Morgan nor Harriman were willing to sell. This triggered a sell-off in the rest of the market as NP “shorts” liquidated holdings in an effort to raise cash to buy NP shares to meet their obligations. The ensuing stock market crash, known as the Panic of 1901, was partially ameliorated by a truce between Hill/Morgan and Harriman. Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later (“covering”) at a lower price.