How Does Short Squeeze Work


Toward the end of 1922, just months after Piggy Wiggly stock was listed on the New York Stock Exchange, some investors started betting against it. To identify stocks where a short squeeze may occur, investors can look out for several things, including the following. A short squeeze happens when many investors bet against a stock and its price shoots up instead. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.


Before you can understand short squeezes, you have to understand how short selling works. If you’ve ever traded stocks, you’ve probably used a market maker. Market makers are the middlemen of the stock market, and in most cases, these are firms, individuals, and or large corporations that facilitate transactions.

The Structured Query Language comprises several different data types that allow it to store different types of information… From late 2019 through early 2020, Tesla stock soared by 400%. Short sellers got hammered, collectively losing about $8 billion. If you’d rather invest directly, you can do so with a share dealing account.

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The price increase drove out some short sellers and attracted various big-name investors and public figures, such as Elon Musk and venture capitalist Chamath Palihapitiya. Active traders will monitor highly shorted stocks and watch for them to start rising. If the price begins to pick up momentum, the trader jumps in to buy, trying to catch what could be a short squeeze and a significant move higher.

If you notice the inventory shrinking quickly, be proactive and trim down positions before the borrows run out. There are two sides of a short squeeze and careful considerations must be taken on each. The opposite of a short squeeze is the less common long squeeze. A squeeze can also occur with futures contracts, especially in agricultural commodities, for which supply is inherently limited.

  • You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million.
  • Due to the rise in prices, sellers are forced to close short positions, creating additional demand and pushing the price even higher.
  • The higher this ratio, the more likely the stock will feature a short squeeze.

The cryptocurrency space has borrowed so much from traditional finance. To understand what is a short squeeze, let’s take a step back and look at short selling or shorting. But this wasn’t the first time the market saw a short squeeze.

How a short squeeze happens

When something happens which drives the of the stock up, the short sellers rush for the exits all at once, attempting to buy to close their positions. This adds fuel to the force propelling the stock price higher and irrationality sets in. What happened to Game Stop’s share price in 2021 is a good example of a short squeeze in action. 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 wrong, they’re forced to buy at a higher price and pay the difference between the price they set and its sale price.

To get the timing right, you need to know that a short squeeze might be coming. However, it’s important to remember that, when short sellers close their positions, they are technically buying shares back from the market. If a stock’s price rises quickly and substantially, this puts a lot of pressure on short positions and may force some of them to “buy to close” their positions. As the number of margin calls increase, short sellers tend to close their position by covering their shorts. This adds to the demand for the stock which evidently sends the stock price higher. Days to cover indicate how fast short trades could be closed given a stock’s daily volatility.

shorted shares

Short sellers hardly expected someone to be interested in large purchases of Volkswagen stock amid the crisis. So, the news about the stock buyout by Porshe took them by surprise. Quick attempts to cover short positions pushed the price even higher.

How a Short Squeeze Unfolds

Short-sellingShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen. Short interest, days to cover, and Relative Strength Index are major technical indicators that give traders significant clues about short squeezing. All this increased buying causes the stock to keep going up. This forces even more short-sellers like yourself into a tighter vise.


A short squeeze occurs when a stock moves sharply higher, prompting traders who bet its price would fall to buy it to avoid greater losses. This way when those short sellers are closing out to avoid losses, you will be profiting off of them. By taking the long position, it provides investors with the opportunity to squeeze out the short sellers. This scenario continues to play out as large numbers of short sellers will cash out their shorts to cut losses. Investors will often attempt to anticipate a short squeeze and purchase stocks that may have a strong interest rate.

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. Both short interest and SIR are on stock quote and screener websites such as FinViz. It is preceded by stops set at different price levels for high-volume short trades.

some straight talk about career training involves illegally selling short shares that don’t exist. Generally, investors must determine whether a stock can be borrowed before they sell it short. However, when investors short a stock without confirming that the shares can be borrowed, the amount of short interest may be higher than the number of outstanding shares. GameStop’s stock price surged due to a short squeeze on major hedge funds that were short the stock and forced to sell to cut losses. The stock price went from less than $5 a share to $325 in just a month. From there, it was a snowball effect of retail investors buying stock and call options.

If shorts have 10 times their daily short volumes, they will need 10 days to close those trades. The higher this ratio, the more likely the stock will feature a short squeeze. The situation with a short squeeze is exacerbated when the number of heavily shorted stocks exceeds the stock’s total number. The stock’s price continues to rise and reaches the levels at which stop-losses are set for those who still hoped the trend would turn down. A short squeeze is a sudden increase in the price of a stock due to a large number of short-sellers buying shares to cover their positions. A short squeeze often feeds on itself, sending the asset’s trading price even higher and forcing more short sellers to cover their positions.

Investors are so confident that the company’s financial condition will worsen in the future that they open sell positions using leverage. The short squeeze has a lot in common with the pump and dump strategy. The goal may be to deliberately inflict losses on specific large investors holding short positions. A short squeeze is always accompanied by a sharp rise in the share price, which is mistaken for a trend move.

You can only engage in a short squeeze with a margin account that charges interest, which is something to consider. It’s also very important to remember, even the most experienced investors have difficulties predicting stock movements on a daily basis. A spike in volume is an upsurge in shares of a stock that indicates price movements. Measuring the volume of stocks can help you understand stock activity and make more informed investment decisions.

Financial advisors can teach you about financial strategies such as short squeezing and short selling if you are interested, as comes with lots of risks. A short squeeze occurs when the price of a stock spikes upward, due to an excess of short selling the underlying security. When investors all move to short the same stock, this causes an upward movement in the stock price. They offer a list of shorted stocks, narrowing down the short-selling information based on the number of short-sold shares.

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