As the stock price begins to rise, short sellers may feel compelled to cover their positions to minimize losses, further exacerbating the price increase. 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. This scarcity of shares, combined with the sudden realization that there were more short positions than actual stock available, pushed the price of Volkswagen stock to astronomical levels. The short sellers were left scrambling to buy back shares at any price to cover their positions, exacerbating the upward pressure on the stock. This is where the short squeezer comes in and buys the stock—while the panic-stricken short sellers are Black Edge causing a further rise in price due to short-term demand. A short squeezer must not only learn to predict and identify short squeezes, but also pick the right time to sell the stock, which is at or near its peak.
Risks of trading in a short squeeze
In general, think of short squeezes as a short-term event, not a long-term trading strategy. Even when a stock price How to buy coti unexpectedly skyrockets, what goes up must come back down eventually, and short squeezes are usually short-lived. In early 2020, Tesla was shorted by investors betting on its failure, with 18% of its outstanding stock in short positions. However, short-sellers eventually lost $8 billion collectively, after Tesla stock went up by 400%.
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The GME stock originally began as a meme stock, or a stock that gained cult status on social media, but it quickly blew up far beyond what anyone predicted. Retail investors bought stock and call options, and as the price increased, more short sellers from hedge funds were driven out. A short squeeze is a rapid, unexpected price increase in a stock or other security, typically driven by short sellers being forced to cover their positions.
This can cause the stock’s price to further increase, resulting in further action by short sellers. Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs. Contrarian investors may buy stocks with heavy short interest to exploit the potential for a short squeeze. A rapid rise in the stock price is attractive, but it is not without risks.
- However, a sudden pressure or increase in the number of shares bought can also lead to a short squeeze.
- Now that we know how to define short squeeze and understand how it works let’s look at a notable example from history.
- First, the bank faced a profit squeeze due to poor returns from its investment portfolio.
- Short squeezes can generate significant profits, but they can also result in substantial losses if not approached with caution.
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. Here’s how a short squeeze works, how it happens and the risks of trading during a squeeze. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Predicting a short squeeze involves interpreting daily moving average charts and calculating the short interest percentage and the short interest ratio.
It gains momentum as a significant number of the short sellers decide to cut losses and exit their positions. For stocks with truly massive amounts of short interest relative to the volume of available shares, this effect can snowball for some time, leading to tremendous volatility and huge spikes in the share price. Looking at GameStop’s short interest, it’s no wonder why the stock has been so reactive to the recent wave of short squeezes.
There are many examples of stocks that moved higher after they had a heavy short interest. But there are also many heavily shorted stocks that then keep falling in price. It’s important to note that buying pressure alone may not atfx broker review be a substantial indicator that a short squeeze will occur, but it may be used in support of other indicators.
How to Spot a Short Squeeze — What Every Short Seller Should Know
The last officially reported quarter was Q4 F2024, which included a 143% increase in sales and near-doubling of the adjusted earnings, with growth expected to continue in F2025. That kind of growth deserves a premium valuation; this stock trades with a price multiple in the low teens. One important thing for long-term investors to keep in mind is that a short squeeze has nothing to do with the long-term investment thesis. It can certainly be nerve-racking to deal with such high volatility, but it’s important to tune out the noise and focus on the long-term case for owning the stock.
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.