Short Squeeze: Meaning, Overview, and FAQs

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If short sellers are mistaken and the business is not overvalued or impaired, going long could be quite profitable. The short interest ratio shows the average number of days needed to exit a short position. 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. The term “squeeze” is used to describe a variety of financial and business situations, typically involving some sort of market pressure.

  1. When that day comes, the investor needs to buy shares in the market to be able to return them to the lender.
  2. This distortion can lead to a stock’s shorting percentage being inflated.
  3. 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.
  4. Bonds with higher yields or offered by issuers with lower credit ratings generally carry a higher degree of risk.

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. For example, in looking at this 1-minute intraday chart of Apple, the price rallies, but without any concrete news or data triggering the selloffs.

Gamma Squeeze vs. Short Squeeze

Banking services and bank accounts are offered by Jiko Bank, a division of Mid-Central National Bank.JSI and Jiko Bank are not affiliated with Public Holdings, Inc. (“Public”) or any of its subsidiaries. As mentioned earlier, short interest is the total amount of outstanding shares that haven’t been closed by short sellers. A high short interest, such as 20% or above, can be an indicator of a short squeeze. A high short interest means that a large number of outstanding shares have been sold short but not yet covered or closed.

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The aim of short selling is to generate profit from a stock that declines in value. One big risk is when a bullish catalyst (earnings, news, technical event, etc.) pushes the stock price higher, prompting short sellers to “head for the exits” all at once. As the shorts scramble to buy back and cover their losses, upward momentum can build on itself, causing the stock to move sharply higher. The GameStop short squeeze had substantial implications for both the market and investors. As the stock price skyrocketed, short sellers were forced to cover their positions, leading to significant losses for some hedge funds. The short squeeze also highlighted the potential power of retail investors when organized and united, challenging the dominance of institutional investors in the market.

For example, if they disagree with the reasoning behind the short-sellers’ bet, they might buy the stock because they think it will rise despite the high short interest. The short-interest 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. A short squeeze occurs when the price of a stock with a significant amount of short interest, is surging. The squeeze creates a positive feedback loop that sends the stock price higher and higher. When an investor sells a stock short, it means they have borrowed shares at what they hope is a high price.

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 Equity day trading the stock as the short sellers begin to cover their positions. The value of Bonds fluctuate and any investments sold prior to maturity may result in gain or loss of principal. In general, when interest rates go up, Bond prices typically drop, and vice versa.

Volkswagen (VW) Short Squeeze

A long squeeze, which has no fundamental basis for the selling, may last for some time, or it may be very brief. Value-buyers or short-term traders who watch for oversold conditions will step in once the price falls to a point deemed “too low,” and bid the shares back up. When there’s a large amount of short interest in a stock, a short squeeze can be triggered by something as simple as a positive earnings report or news headline. As more and more short-sellers are forced or decide to cover their positions by buying the stock, the price rises higher and higher. Sometimes a short squeeze convinces other investors to buy, sending the price up even further. 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.

However, his victory was short-lived as the New York Stock Exchange eventually suspended trading on the grocery store chain. Holding company Porsche SE owned a big chunk of the shares, and the German government also owned a large stake, meaning that relatively few shares were actually traded in the public market. There was ample speculation that Porsche would buy the rest of Volkswagen. If you’re buying a stock that seems to be in the throes of a short squeeze, especially at high levels, it helps to understand other potential reasons why the stock might be moving.

In the dynamic investment world, various strategies and events can significantly impact the prices of stocks. One such phenomenon that has gained considerable attention in recent years is the Short Squeeze. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on, top-rated podcasts, and non-profit The Motley Fool Foundation.

The term squeeze is used liberally in finance and business and describes various situations in which people are realizing losses, taking gains, or finding credit difficult to obtain. Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes—are explained below. Squeeze situations are often accompanied by feedback loops that can make a bad situation worse due to market psychology. Naked short selling is short selling a stock without first borrowing the asset from someone else. It’s the practice of selling short shares that have not been affirmatively determined to exist.

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. Short sellers zero in on a stock that they think is overvalued by the market.

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. When a heavily shorted stock unexpectedly rises in price, the short sellers may have to act fast to limit their losses. Short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall. If they’re right, they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position. If they’re wrong, they’re forced to buy at a higher price and pay the difference between the price they set and its sale price. Porsche’s acquisition of Volkswagen shares created a shortage in available stock for trading, as the float—the number of freely traded shares—was limited.

Their public statements and tweets in support of the retail investors fueled even more buying interest, pushing the stock price to unprecedented levels. To fully understand the short squeeze, we must have a firm grasp on the concept of short selling. Let’s say Company A is targeted by a short-seller who issues a report publicizing his short thesis. The short-seller alleges fraud in the company and bets that its stock will fall.

A short squeeze is a market phenomenon in which a shorted security, such as a stock, jumps unexpectedly in price. We believe everyone should be able to make financial decisions with confidence. 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. The long squeezes were quickly met with buying, showing that it was panicked long holders taking profits and cutting losses who caused the declines, and not a fundamental shift in the value of the company. This is because during most days there is no new fundamental news about the company, and on many days there is not even news about the economy.

Speculative stocks tend to have higher short interest than more stable companies. By keeping an eye on these causes and indicators, investors can gain insights into potential short squeeze opportunities. However, it is important to note that not all high short interest stocks or technical patterns will result in a short squeeze.

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