Short Squeeze: Definition and Case Studies

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  1. The aim of short selling is to generate profit from a stock that declines in value.
  2. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.
  3. Suppose that Company C was borrowed on margin by a trader who then sold 1short 00 shares at $25.
  4. This approach differs from “going long,” which is when an investor buys stock with the expectation that prices will rise over the long run.

This is the short squeeze, as those short the market get “squeezed” out. They either have to put more money up to secure their position or close their positions. So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze.

In 2022, short sellers targeted troubled companies such as Bed, Bath & Beyond (BBBY) and Carvana (CVNA). In early 2023, the most heavily shorted companies included Coinbase Global (COIN), a cryptocurrency firm, and Occidental Petroleum (OXY). Enough investors started buying the stock late in 2020 and the share price began to rise noticeably late in 2020.

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Targets for short squeezes

To understand the short squeeze meaning further, it’s important to understand short and long positions, the roles of short sellers and buyers, and how these forces can create a bullish trend in the stock market. As recently as September 2020, GameStop traded for less than $2 a share (split-adjusted). 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.

Terms connected to a short squeeze

You should consult your legal, tax, or financial advisors before making any financial decisions. This material is not intended as a recommendation, offer, or solicitation to purchase or sell securities, open a brokerage account, or engage in any investment strategy. Short squeezes occur when a highly shorted stock suddenly and quickly increases in price. A stock is shorted when short sellers bet on the stock going down. Successful short squeezes can cause short sellers to lose a lot of money.

The financial takeaway

Small-scale short squeezes may happen any time, for example, after a company reports earrings. The stock may rise as “longs” purchase it, and the higher price hurts short sellers, so they decide to close their position by repurchasing the stock, putting further upward pressure on the stock. One is the short interest – the percentage of a stock’s total number of shares that are currently held by short sellers. When the percentage of the stock’s total shares that are currently sold short is significantly higher than the normal level, the likelihood of short squeeze is considered to be increased. Fearing that the stock will continue its upward move, they move to exit their short positions with the necessary buy order.

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. When long squeeze situations arise, they are generally concentrated in stocks that have a limited float or market capitalization, or at least the selloffs in these types of stock can be quite dramatic. These small or even micro-cap securities do not always enjoy a healthy level of liquidity that can support price levels from irregular trading volumes. A quick trader or automated trading system can jump on an opportunity to exploit a long squeeze before others bring the stock back from its oversold state. In October 2008, as the Great Recession took a toll on economic markets, the prospects of the Porsche SE deal began to fade.

In the case of TSLA in 2020, there were some positive fundamentals underlying the short squeeze, including the company’s more consistent profitability and hopes of it being included in the S&P 500 Index (SPX). The stock saw its share price run up to new highs, then decline nearly 60%. If the stock price rises instead, a short-seller may lose money — they still have to return the shares to the broker, which may require buying them back at the new higher price. The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes.

This sometimes happens with companies that are on the verge of filing for bankruptcy. During the 2008 financial crisis, Porsche Automobile Holding SE (POAHY), already a major holder of Volkswagen AG (VWAGY) shares, increased its total stake in Volkswagen to about 75%. The state of Lower Saxony also owned more than 20% of the company, leaving few remaining shares https://bigbostrade.com/ available to trade at a time when the stock was being heavily shorted. Hedge funds and other short sellers were suddenly left in a tricky position as Porsche’s move meant that not all of them could cover their positions. Against this backdrop, short sellers were forced to buy back the shares they sold, which helped drive Volkswagen’s share price up to €999.

Brokerage firms are very concerned about the volatility of these moves, as they know they may face losses if customers can’t cover positions. They started limiting the positions that can be taken in some of these names. Buying calls requires much less capital, so bigger positions can be taken by small traders.

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