What Is a Short Squeeze?

what is a stock squeeze

Correctly timing a short squeeze can be a very lucrative strategy, but with this high reward potential comes high risk. A trader looking to profit from a potential short squeeze should make a careful study of short squeeze predictors https://www.day-trading.info/ including short interest, the short interest ratio, daily moving averages, and industry trends. This unexpected rise in the share price can signal to other short-sellers to exit the short, further driving the price up.

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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Also, looking at the Volkswagen chart above, notice the price went down nearly as fast as it went up.

When an investor decides to short a stock, they are betting that the price will decline in the short term. But if the opposite occurs, the only way for them to close their position is to go long by purchasing shares of the stock. This can cause the stock's price to further increase, resulting in further action by short sellers. Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher.

  1. The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes.
  2. Correctly timing a short squeeze can be a very lucrative strategy, but with this high reward potential comes high risk.
  3. Against this backdrop, short sellers were forced to buy back the shares they sold, which helped drive Volkswagen’s share price up to €999.
  4. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.

But there are also many heavily shorted stocks that then keep falling in price. When identifying stocks at risk of a short squeeze, two useful measures are short interest and the short interest ratio. Every buying transaction by a short seller sends the price higher, forcing another short seller to buy. Short squeezes only happen when a lot of traders have shorted the same stock. Even in a best-case scenario, a short squeeze is a quick occurrence -- not a long-term strategy.

Positive product news or earnings reports can quickly derail a short. Frantic buying can drive stock prices to rise out of control, squeezing the short-sellers out of their positions. Long squeezes are not as dramatic to the market as short squeezes but can be witnessed by looking at the intraday charts of any large stock. Stocks will always fluctuate day to day, whether or not there is any new news coming out about a company.

You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million. GameStop – a struggling retail chain selling video games and accessories – shot higher by as much as 2,464% at the peak of its 2021 short squeeze in January. Even now, after several spurts and pullbacks, it remains up after a considerable pullback, it remains up 1,070%. Most stock market participants invest using buy-and-hold strategies, aiming to identify strong companies with bright, long-term futures. A short squeeze also figures prominently in the plot of the classic film “Trading Places.” In the film the main characters “put the squeeze” on orange juice commodity futures.

At one point, more than 100% of GameStop's float was sold short – an excessively high number meaning that every share available was borrowed at least once to be sold short, but some were borrowed multiple times. The kindling needed to start a short squeeze is a stock for which many investors hold short positions. Before you can understand short squeezes, you have to understand how short selling works.

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Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs. Watching short interest can tell you whether investor sentiment about a company is changing. For example, if a stock typically has a 15% to https://www.investorynews.com/ 30% short interest, a move above or below that range could signal that investors have shifted their view of the company. 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.

Speculative stocks tend to have higher short interest than more stable companies. Short interest signifies the number of shares that have been sold short but are yet to be covered or closed out. The higher the short interest, the more a specific stock is viewed by investors to have a negative outlook.

what is a stock squeeze

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 one 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. In general, the higher a stock’s days-to-cover figure, the more susceptible it may be to a short squeeze.

Where Can I Find Information on Stocks with High Short Interest?

Those who didn't think a deal with Porsche would happen, or were buying Volkswagen stock to hedge another investment, shorted the automaker's stock, assuming that its price would fall eventually. Short squeezes can be exciting, especially if you own the stock before it rockets higher, though many short squeezes are relatively modest. Still, it’s important to understand that no one knows when a short squeeze will end. So, if you decide to try your luck trading them, tread carefully. Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account.

That is, naked shorting can force a price drop, which leads to some share sales to cut losses, allowing the market to effectively find balance. 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.

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The stock of theater chain AMC has also been the subject of a short squeeze, though not as prominently as GameStop. Some have suggested that Tesla has been subject to a years-long short squeeze, given its high short interest and massive overvaluation, relative to competition. While high-profile squeezes get a lot of press when they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth. When a stock suddenly experiences a dramatic climb, with or without good news, it's important to ask yourself, "Who would buy shares up here?" The answer? Someone who doesn't have enough money to hold on any longer, or someone whose pain threshold has finally been crossed. Our partners cannot pay us to guarantee favorable reviews of their products or services.

In early March 2020, Tesla’s stock finally fell, along with most others, during a market downturn. However, the stock eventually bounced back, leaving Tesla short sellers collectively nursing losses of more than $40 billion during the course of 2020. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.

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