Short Squeeze

The short interest ratio is the total number of shares sold short divided by the stock’s average daily trading volume. Speculative stocks tend to have higher short interest than more stable companies. Short interest refers to the total number of open short positions for a stock. In the face of a short squeeze, short sellers should attempt to cover their short interest through buying actual shares of the company that they were betting against. However, short squeezes happen when a company’s share price goes up instead, and short sellers are forced to cut their losses and buy back stocks at a loss to themselves. Short sales have an expiration date, so if the stock price goes up, short sellers have to pay the difference when repurchasing the stock.

Short Squeeze

In 2021, we saw a number of stocks make truly staggering jumps, doubling in price on consecutive days. There are several factors that contributed to these gargantuan moves, but one is surely the classic short squeeze. Instead of sinking, it’s climbing — and it exceeds the price you bought it for. The downsides of a short squeeze are significant, making shorting a stock a very risky strategy for all but the most experienced traders. Signs of a short squeeze include frequent buying of a high number of shares being sold short.

Risks of trading in a short squeeze

Even relatively modest rises in the stock could stoke a squeeze. Because https://www.bigshotrading.info/s are often driven by technical factors rather than fundamental factors , it’s vital that long investors clearly understand the long-term prospects of the business. If short sellers are mistaken and the business is not overvalued or impaired, going long could be quite profitable. With GameStop in 2021 and Tesla in 2020, there were many classic signs of a short squeeze. Traders with short positions were covering because they had to, either because they had sustained large losses, or shares were no longer available to be borrowed. 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.

  • But there are also many heavily shorted stocks that then keep falling in price.
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  • Some of those indicators may be short interest, days to cover or the short interest ratio, buying pressure, and the relative strength index .
  • While a low short interest ratio shows a lower average of days needed to cover a position, a high short interest ratio shows the opposite.
  • Any expressions of opinion or assumptions are for illustrative purposes only and are subject to change without notice.

In October 2008, as the Great Recession took a toll on economic markets, the prospects of the Porsche SE deal began to fade. Simultaneously, investors hoping to capitalize on an imminent price decline took a large number of short positions. Porsche SE then shocked the market by announcing the company had been quietly building its stake in Volkswagen via call options, and that only about 6% of the stock remained in the open market. While short squeezes don’t happen very often, there have been many short squeezes throughout history. Most are significant and result in rapid and astonishing price jumps. Short squeezes are usually short-lived, but even the briefest squeeze can cause huge losses for short sellers who are unable to close out their positions quickly.

Day Trading Guide

Between Jan. 4 and Jan. 27, 2021, GameStop shares spiked from $17.25 to $483. You have a lot of Short Squeeze short sellers, all of whom have borrowed shares and all of whom must eventually pay them back.

The result of this will not only cause ABC’s share price to increase, but it will also cause other short sellers to get nervous that ABC’s stock is continuously increasing instead of decreasing. This will lead to more short sellers rushing to buy ABC stock back to exit their position and minimize further loss. It will also cause regular buyers to continue to purchase ABC stock because of its continued increase in value. 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. Trading on a short squeeze can bring an extremely high level of risk for short sellers.