Forex Trading

What Is A Short Squeeze In Stock Trading


However, it is not uncommon to see the float rate even higher at 50%. Due to the price sensitivity, short-sellers tend to close out their positions at the slightest hint of an upturn in the stock. Eventually, the short-sellers are squeezed out leading to demand which in turn pushes the stock higher. The reversal was met with the weak short positions covering their bets. This led to additional demand in the stock contributing to the bounce. A short squeeze is defined a bounce or a jump in the stock’s price.


Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. This dynamic can result in a cascade of stock purchases and an even bigger jump of the share price. Borrow, buy and sell timing can lead to more than 100% of a company’s shares sold short. This does not necessarily imply naked short selling, since shorted shares are put back onto the market, potentially allowing the same share to be borrowed multiple times.


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What is a short squeeze

These investors, also called short sellers, employ the trading strategy of shorting stocks that they believe are overvalued in the market. Short sellers borrow shares from other investors and sell them, but then must return the shares to the original lender. So, the short sellers buy back the shares at a discounted price if the company’s share price has indeed gone down over time. Regardless of a stock’s performance and whether or not it performs well, the short seller will always have to return the borrowed stock to their broker. The short seller can pocket a profit from using this strategy, but the losses that can be accrued from this may outweigh the potential gains.

Based on the service model, the same or similar products, accounts and services may vary in their price or fees charged to a client. As of 2008, abusive naked short-selling has been prohibited by the Securities and Exchange Commission . Abusive naked short-selling is defined by the SEC as selling a short stock that the seller has not actually bought and failing to deliver it to the buyer. Shorting a stock involves borrowing the stock, usually from a broker, and selling it now in hopes of buying it back later for less in order to make a profit. Now that we know how to define short squeeze and understand how it works, let’s look at a notable example in history. One of the biggest short squeezes that took place in history was the 2008 Volkswagen short squeeze.

  • A rise in short interest above the norm indicates that investors have become more bearish.
  • 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.
  • However, these investors were not aware that Porsche SE had been quietly buying almost all freely traded ordinary Volkswagen shares in an attempt to take over the company.
  • Short sellers are being squeezed out of their positions, usually at a loss.
  • On Jan. 22, the stock jumped again, trading above 70 on the biggest volume day up to that point.

A squeeze occurs when a heavily shorted stock experiences an increase in price for some unexpected reason. This situation prompts short sellers to scramble to buy the stock to cover their positions and cap their mounting losses. The surge in demand for the stock puts additional upward pressure on the stock price, which makes the losses even greater for short sellers who remain exposed. In order for a short squeeze to occur, there must be a large number of short-sellers that together hold a significant number of shares short. Now, any positive catalyst in such a situation may cause short sellers to start panicking leading to increased buying of the stock as the short sellers begin to cover their positions. When short sellers enter into the second phase to purchase ABC stock back, this makes them buyers.

If you do decide to venture in, make sure you have no illusions and no misconceptions of the dangers. Understand that when you’re dealing with a stock that’s being squeezed, you’re taking a big risk. Even in a best-case scenario, a short squeeze is a quick occurrence — not a long-term strategy. Buying into a company in the hope of lassoing a rocketing price is speculative at best.

A short squeeze refers to a situation where a stock you have placed a short bet on rises spectacularly. When it happens, many traders lose more money than what they have traded in initially. Movie theater company AMC Entertainment Holdings Inc. and brick-and-mortar retailers like Express and Bed Bath & Beyond have been recent short-squeeze targets since 2021. Most shorted stocks from companies like Yahoo Finance can help you identify heavily shorted stocks, too. The number of days it would take for a company to recover the shorted stocks during normal trading. Small-cap stocks) are good candidates to be shorted, as are stocks with high short interest, or a high percentage of stock shares held by short-sellers.

What Happens During A Short Squeeze?

A short squeeze is caused by a rapid and unexpected surge in the price of an asset – usually a stock. Short sellers will seek to abandon their short positions as prices rise. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. In May, the apes had managed to push the price up to nearly $30, but then AMC announced free popcorn for all retail investors on June 2. The hedge funds and financial institutions who had taken bearish positions lost billions.

In August 2020, Tesla shares rose from $300 to $450 in a month, spurred on by nothing more than good press. By the end of 2020, short sellers had racked up approximately $40 billion in losses. When certain levels are hit and signals are sent out, huge numbers of technical traders can spring into action. Key price points indicate when a stock is oversold, and when they’re met it indicates a potential reversal of a downtrend, which may lead to a short squeeze. Let’s say Company A is targeted by a short-seller who issues a report publicizing his short thesis.

The ratio measures the number of days it would take all short-sellers to exit their positions based on the average daily trading volume. The higher the short-interest ratio, the greater the chance of a squeeze. However, if the stock price increases a lot in a relatively short amount of time, they may cut their losses by buying shares at the higher price. When this happens, the short-sellers are squeezed out of their position, being forced to buy shares at a loss.

Schwab Market Update: Stocks Gain Ground in a Volatile Trading Day

For a highly shorted stock, if there is any positive news regarding the stock’s future, it can boost demand for the stock and ignite a short squeeze. For most people, investing in the stock market means that you buy a security with the expectation that you’ll profit financially as the stock increases in value. This concept is often called going long on a stock, or having a long position. AMC Entertainment stock was heavily shorted as the company faced bankruptcy due to the enforced closure of cinemas at the start of the coronavirus pandemic.


A short squeeze situation arises when short sellers have to buy back their shares, given the constantly rising market prices. On the contrary, a gamma squeeze involves market makers betting on stocks when they observe multiple call options purchases for a particular stock by traders. You can pair these indicators with the stock’s short interest – the total number of shares that have been sold short, but which have not yet been covered or closed, expressed as a percentage. This is important because the higher the ratio of short shares to shares typically traded, the higher the demand for the stock will be among short sellers once the price starts rising. Typically, you’ll want to look for stocks where the number of shares short is at least five times the average daily volume. Ideally, the number of shares short should also make up a significant fraction of all the available shares – 10% or more.

It can be an instance of unexpected good news regarding the stock, such as a very favorable earnings report that far exceeds the expectations of market analysts. It can also be that technical traders begin buying the security as they see indications that it is oversold and, therefore, possibly ripe for a reversal to the upside. If you look at the technical chart, as the short interest started to increase, price fell sharply. At the same time, the technical indicators were pointing to a bullish divergence.

These stock picks will potentially show you the possibility of a short squeeze that can occur. This is an important metric as it can tell you whether the short position is crowded. Usually, as the percentage of short float grows, you can anticipate a short squeeze. Level 2 data is important for traders because it shows the full range of open orders for a stock, not just the current best bid and ask price. Using Level 2 data, you can identify potential trades before they become apparent on technical charts or get additional… Heavy volume accompanied by large price spikes generates interest as the stock hits price tickers and radar screens.

Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. For more information please refer to your account agreement and the Margin Risk Disclosure Statement. The stock saw its share price run up to new highs, then decline nearly 60%. Meme stocks describe the shares of companies that have gained a cult-like following on social media, which can influence share prices.

A notable short squeeze happened in October 2008, when the Volkswagen share price quintupled from €210 to over €1000 in two days. It caught the market completely by surprise and, for a brief period, Volkswagen was the most valuable company in the world. Short squeezes will usually catch the markets off guard, and oversold indicators and a high or low short interest do not guarantee that a short squeeze will happen. Often, higher than expected company earnings, technological breakthroughs or new sector-shifting products will cause prices to rise unexpectedly. If investors are using a short covering strategy with borrowed stock, they will need to buy back the shares which they have borrowed to open the short position before the expiration date arrives. The expiration date in a short cover is the date on which the borrower agrees to return the stock to the lender.

First, a few years ago, Bill Ackman placed a short bet on Herbalife, a company that sells products through a multi-level approach. After shorting the stock, Carl Icahn, his rival, entered a large buy position. After borrowing the shares, you sell them for $10,000 and hold the money. If the shares goes down to $5 which you had predicted, you can now buy them back and return the 1000 shares to the investor.

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. The GameStop short squeeze, starting in January 2021, was a short squeeze occurring on shares of GameStop, primarily triggered by the Reddit forum WallStreetBets. This squeeze led to the share price reaching an all-time intraday high of US$483 on January 28, 2021 on the NYSE. This squeeze caught the attention of many news networks and social media platforms. Short squeezes can also be facilitated by the availability of inexpensive call options on the underlying security because they add considerable leverage. Typically, out of the money options with a short time to expiration are used to maximize the leverage and the impact of the squeezer’s actions on short sellers.

With very little supply left, the stock prices skyrocketed into a short squeeze as short sellers scrambled to sell their shares. 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. The higher this number, the more likely a short squeeze is coming.

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