Short Squeeze: Definition and Case Studies

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During a short squeeze, short-sellers run the risk of losing a substantial amount of money if the stock price continues to increase. Another iconic example is the Volkswagen (VOWG) short squeeze that occurred in 2008, during the global financial crisis. This event demonstrated how a combination of factors, including a takeover bid and limited available shares, can lead to an unprecedented surge in a stock’s price.

A market squeeze can refer to either a ‘short squeeze’ or a ‘long squeeze’. A short squeeze affects short sellers, who are effectively ‘squeezed’ out of the market in light of rapidly increasing prices. They will attempt to exit their short positions as quickly as possible to cut their losses. The Volkswagen short squeeze had significant consequences for the market and investors. The stock price surged over a few days, rising more than tenfold, making Volkswagen briefly the most valuable company in the world by market capitalization. Many hedge funds and institutional investors suffered substantial losses as they were caught in the short squeeze and struggled to cover their positions.

How to Trade a Short Squeeze

There’s social trading platforms the “short percentage of the float” – that’s the percent of the shares available for trading that are currently being held short. At one point, more than 100% of GameStop’s float was sold short – an excessively high number meaning that every share available was borrowed at least once to be sold short, but some were borrowed multiple times. You have a lot of short sellers, all of whom have borrowed shares and all of whom must eventually pay them back. To identify a short squeeze, many traders will use chart indicators to find oversold stocks. If a stock or other asset is oversold, then people might expect its price to increase.

Online resources like MarketBeat provide useful short-selling data such as the largest short interest positions, changes in such positions over time, and short interest ratio. Exchanges such as the New York Stock Exchange and the Nasdaq also publish short interest data for the exchanges as a whole. Short squeeze is a term used to describe a phenomenon in financial markets where a sharp rise in the price of an asset forces traders who previously sold short to close out their positions. The strong buying pressure “squeezes” the short sellers out of the market.

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A short squeeze gets its name because short sellers are being squeezed out of their positions, usually at a loss. 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.

This creates what is referred to as a stock squeeze or a squeeze from the pressure of short sellers being forced to exit the position. In 2008, Porsche, a German automobile manufacturer, quietly acquired a significant stake in Volkswagen. As Porsche’s stake in Volkswagen continued to increase, it caught many investors and hedge funds off guard.

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As more short sellers cover their positions, the buying pressure intensifies, causing the stock price to rise even more rapidly. This creates a feedback loop in which the price increase forces more short sellers to cover their positions, leading to further price acceleration. Short squeezes can present benefits and risks depending on your investment projections as an investor.

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• In addition, Porsche’s unexpected announcement and major increase in its stake ownership in Volkswagen left very few available shares for short sellers to account for.
• GameStop – a struggling retail chain selling video games and accessories – shot higher by as much as 2,464% at the peak of its 2021 short squeeze in January.
• Let’s explore the factors that contribute to the occurrence of a short squeeze and the technical indicators that can provide insights into this market phenomenon.

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. A short squeeze occurs when a surge in buying activity forces short sellers to panic and cover their positions by buying back the shares they borrowed. This rush to buy drives the stock price even higher, leading to a self-reinforcing cycle that can result in significant losses for short sellers and substantial gains for those on the other side of the trade.

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These case studies provide real-life examples of how short squeezes can unfold, the factors that contribute to their occurrence, and the consequences they can have for both the market and investors. Short-sellers enter the market with a belief that a company and its stock price are overvalued. This approach differs from “going long,” which is when an investor buys stock with the expectation that prices will rise over the long run.

Traders and investors should conduct thorough research, stay informed about market dynamics, and implement effective risk management strategies. By doing so, you can navigate the complexities of short squeezes with greater confidence and increase their chances of success. So, when it comes to a squeeze, short sellers decide to repurchase the stock, sending it higher.