What Exactly Is a Short Squeeze?

what is a stock squeeze

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  1. The continued rapid rise in price also attracts buyers to the security.
  2. A positive news story, a product announcement, or an earnings beat that excites the interest of buyers can defeat a short position.
  3. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves.
  4. They sold borrowed shares for $100, repurchased them for $70, returned the shares, and pocketed the difference.
  5. Since a short seller’s buying decision for a stock makes a stock’s price increase, this ultimately leads to other short sellers buying to exit the position.

To fully understand the short squeeze, we must have a firm grasp on the concept of short selling. The action was certainly partly stock buying by the Reddit group wallstreetbets. As with any investment, there are some risks of betting on a short squeeze. Sometimes the reasoning behind going short on a particular stock is strong enough that it will decline even though short interest is high. Investment Plans (“Plans”) shown in our marketplace are for informational purposes only and are meant as helpful starting points as you discover, research and create a Plan that meets your specific investing needs.

Volkswagen Short Squeeze (

What happened to Game Stop’s share price in 2021 is a good example of a short squeeze in action. Suppose many traders and investors are short from $50 due to bad earnings, and the stock is currently trading at $35. However, over the next quarter, the company reports stellar earnings and doubles in value to $70. Since many traders are short, they would need to cover their short positions to limit their losses; this creates buying pressure on the stock and causes the price to increase to $80. “Short covering” and “short squeeze” are different terms to describe a situation involving short positions. A short squeeze is a situation in which a security’s price increases significantly, putting pressure on short sellers to close their positions and limit their losses.

what is a stock squeeze

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. Fearing that the stock will continue its upward move, they move to exit their short positions with the necessary buy order. As previous short sellers enter buy orders to close out their positions, it adds fuel to the buying fire, attracting more buyers and pushing the stock’s price even higher.

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The higher the ratio, the higher the likelihood short sellers will help drive the price up. A short interest ratio of five or better is a good indicator that short sellers might panic, and this may be a good time to try to trade a potential short squeeze. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Neither Schwab nor the products and services it offers may be registered in your jurisdiction.

These investors, who had taken substantial short positions in Volkswagen stock, were suddenly faced with a squeeze they did not anticipate. 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. Thorough analysis and a holistic understanding of market dynamics are necessary to make informed investment decisions. They either have to put more money up to secure their position or close their positions.

what is a stock squeeze

These concerns may cause banks to be more reluctant to lend out money within the interbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding exness forex review can cause the overnight borrowing rate to spike significantly above the benchmark rate, and as a result, the cost of borrowing will increase. Everyone who shorted the stock between $9 and $5 is now in a losing position.

If you paid any attention to this year’s action in GameStop (GME), you’ve no doubt heard the words “short squeeze.” 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 bdswiss forex broker review in the plot of the classic film “Trading Places.” In the film the main characters “put the squeeze” on orange juice commodity futures. All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

What Is a Short Squeeze?

Identifying a short squeeze can be relatively simple—after the fact. The trick is to identify the conditions that could lead to a squeeze ahead of time, and then determine how you might want to play it (or not). 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. When Porsche announced a takeover of Volkswagen in October 2008, short-sellers scrambled and prices soared. Volkswagen briefly became the most valuable company in the world before prices declined.

But if you do decide to short, make sure you keep your position sizes modest and try to cut your losses early if the trade goes the wrong way. SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. 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 Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.

The squeeze creates a positive feedback loop that sends the stock price higher and higher. Short squeezes only happen when a lot of traders have shorted the same stock. Given that short squeezes can create those kinds of gaudy returns, it’s worth reviewing what exactly a short squeeze is.

The short-seller alleges fraud in the company and bets that its stock will fall. Based on that thesis, many other investors go short on the stock because they believe there is fraud. It’s a good idea for investors who want to bet on a short squeeze to have other reasons for buying the stock. 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. When an investor sells a stock short, it means they have borrowed shares at what they hope is a high price. They sell those borrowed shares at the price the stock was at when they borrowed them.

It slowly gathered momentum through the end of the year and started 2021 at more than $4 per share. Many investors thought the company was going broke and invested accordingly. One short seller had a huge position in the stock, and short interest was greater than the number of shares of outstanding stock. Correctly timing fusion markets review 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 including short interest, the short interest ratio, daily moving averages, and industry trends.

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