What is a short squeeze? (2024)

FAQs

What happens during a short squeeze? ›

A short squeeze occurs when a stock moves higher and short sellers decide to cover their short positions or are forced to do so via margin calls. As these short sellers buy the stock, the price rises, potentially creating a situation in which more shorts have to cover.

Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal. In addition, short sales used to manipulate the price of a stock are prohibited.

Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs.

In general, short squeezes tend to last somewhere between several days and several months. There is no real “typical” length for a short squeeze, as each one is unique.

Short Squeeze Basics

MOASS, meaning the Mother of All Short Squeezes, as noted, is a trading strategy in which a high volume of buyers drive up shares of stocks that were being “shorted” by other investors.

In such a case, they have to compete with each other in a sense, because others are also clamoring to get rid of their stock—and there's no fundamental limit to how high the stock could climb as brokers initiate margin calls forcing shorts to buy to cover.

Short squeezes typically happen only when the short interest in a stock is very high. It takes a lot of short sellers buying shares to push the price of a stock strongly upward. Short squeezes are usually short-lived and end when short sellers have fully exited their positions or stop buying shares to cut their losses.

In order to trade short squeezes, you should do thorough research on the share market beforehand. One strategy for trading on a short squeeze is to go long on (or buy) the asset that is set to rise in share price; however, different strategies will work for different trading personalities or overall goals.

At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month.

Did Tesla ever short squeeze? ›

Notable examples of a short squeeze include GameStop (GME) in 2021, Tesla (TSLA) in 2020, and Volkswagen (VWAGY) in 2008.

In fact, some stocks went on to deliver mind boggling returns of 1,000% or more. While there were 10 baggers in the midcap space too, several stocks from the penny stock category raced up so much that they are a penny no more.

Signs of a Short Squeeze

These are: An asset trading near its 52-week lows and the price is much lower than the fair value estimated by experts. The reasons for the gap may be many, but markets eventually correct and settle closer to the fair value.

This ratio is calculated by dividing the number of shares sold short by the average daily trading volume of the stock. A higher ratio indicates significant short interest. Financial news outlets and investment research platforms often discuss heavily shorted stocks and market trends related to short selling.

If that happens, the short seller will be forced to buy back the stock in order to return the shares borrowed. Because short sellers exit their positions with buy orders, their exit can push prices higher, which leads to more covering of short positions, creating a vicious circle.

Signs of a Short Squeeze

These are: An asset trading near its 52-week lows and the price is much lower than the fair value estimated by experts. The reasons for the gap may be many, but markets eventually correct and settle closer to the fair value.

Understanding Short Squeezes

Eventually, the seller will have to buy back shares. If the stock's price has dropped, the short seller makes money due to the difference between the price of the stock sold on margin and the reduced stock price paid later.

A short squeeze occurs when a stock that is heavily shorted experiences a rapid increase in price that forces short sellers to cover their positions by executing buy orders at market price. This generates a massive imbalance between supply and demand where short sellers lose, and the bulls of Wall Street win.