Short Squeeze What is it and How to Identify the Setup

Here is a list of our partners and here’s how we make money. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Also, looking at the Volkswagen chart above, notice the price went down nearly as fast as it went up. By the end of 2008, the stock’s price was basically back to where it started before the squeeze.

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. Technical traders also look at indicators such as the Relative Strength Index (RSI), which are intended to indicate overbought or oversold conditions in a market. A market is considered to be oversold when the RSI reading is below 20. The Bullish Bears trade alerts include both day trade and swing trade alert signals. These are stocks that we post daily in our Discord for our community members.

The event continued to attract more notable figures like Elon Musk and venture capitalist Chamath Palihapitiya. Measuring a short squeeze can involve a metric called the short interest ratio, aka or “days to cover.” It indicates, in days, how long it would take to cover or buy back all the shorted shares. Basically, you divide the number of shares sold short by the average daily trading volume. The more days to cover, the more pronounced the effect can be.

Data for stocks traded on the NYSE, NASDAQ, AMEX and OTC are delayed 20 minutes. 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. In order to understand this, we must first know how you can short stocks. Shorting or short selling is based on the investor or the day trader borrowing shares and selling them. Correctly timing a short squeeze can be a very lucrative strategy, but with this high reward potential comes high risk.

The below filter, from Finviz.com shows the mid-cap stocks traded on NASDAQ exchange. The rally came on the news about Turing Pharmaceutical Company’s CEO Martin Shkreli taking a majority stake in KaloBios’ shares. Needless to say, the reversal put Campbell into a margin call and being heavily in debt with his broker. A short squeeze is a high risk situation and it may cause havoc in the market, but most don’t last forever.

One of the biggest short squeezes of all time: Volkswagen

Short selling is risky because it has limited upside, but unlimited downside. If you paid any attention to this year’s action in GameStop (GME), you’ve no doubt heard the words “short squeeze.” Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

• Clarence Saunders founded Piggly Wiggly, the first full-service grocery store chain, and he took on Wall Street himself by attempting to orchestrate a massive short squeeze.
• The naked shorting tactic is high risk but also poses a high reward.
• What you must know is that you could lose more money that’s not even yours if you borrowed it using margin.

We put all of the tools available to traders to the test and give you first-hand experience in stock trading you won’t find elsewhere. We also offer real-time stock alerts for those that want to follow our options trades. You have the option to trade stocks instead of going the options trading route if you wish. People come here to learn, hang out, practice, trade stocks, and more. Our trade rooms are a great place to get live group mentoring and training. They then have to cough up the difference between the price they shorted at the new price.

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This concept is often called going long on a stock, or having a long position. Besides the above strategy, you can also develop your own such as trading short when the short interest starts to build. However, due to the risks of short selling and the margin requirements trading the upside is always a better opportunity. The short float ratio, as the name infers is a ratio that calculates the number of shares that are short compared to the total shares outstanding.

Saunders owned 99% of Piggy Wiggly’s stock by March 1923, which meant short-sellers would have had to buy from him to cover their positions. However, if the stock price increases a lot in a relatively short amount of time, they may cut their losses by buying shares at the higher price. When this happens, the short-sellers are squeezed out of their position, being forced to buy shares at a loss. 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.

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In the event of a short squeeze, short-sellers who haven’t borrowed the shares they shorted will fail to deliver those shares because they don’t exist. The short-interest ratio measures the number of days it would take all short-sellers to exit their positions based on the average daily trading volume. The higher the short-interest ratio, the greater the chance of a squeeze. Technical traders view the situation as indicating that the market may be due for an upside reversal in price movement.

Still, short selling among the day trading community is quite common. His research, from his website here gives numerous fundamental reasons for shorting a specific stock. Most importantly, it takes a lot of market observation and a focus on the fundamentals to get it right. Is there anything that would make you want to own the stock? It’s important to always do your homework, and remember it’s never wise to go all in.

Another important metric to look at when trying to identify stocks where a short squeeze may occur is the short-interest ratio. It weighs the amount of short interest against the stock’s average daily earning retention ratio formula trading volume. This sudden high demand could cause the stock’s price to rise even more sharply to $130 or $140 per share. The dramatic jump in price “squeezes” those who shorted the stock.

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. A short squeeze involves a rush of buying activity among short sellers due to an increase in the price of a security. The increase in the security price causes short sellers to buy it back to close out their short positions and book their losses. Suppose that Company C was borrowed on margin by a trader who then sold 1short 00 shares at $25. Several days later, Company C’s stock price plummets to $5 per share, prompting the trader to buy it back.

Risks of trading in a short squeeze

Looking at a 50-day (or longer) moving average chart will show whether there are peaks in a stock’s price. To view moving average charts, check out one of the many charting software programs available. These will allow you to plot this on your chosen stock’s chart.

After shorting the stock, the short seller then closes the sell position and returns the stock back to the broker. There have been many studies and articles covering the risks of short selling. Some events that may encourage short sellers to open positions can include a product announcement, a positive news story, or an increase in the stock’s performance that attracts buyers.

These are some of the hottest stocks on social media, often supported by the subreddit WallStreetBets (WSB). Because you can’t sell something you don’t own, shorting requires the seller to “borrow” the stock (and pay interest to the stock lender), then sell it. If you’re a long-term investor who happens to own a stock that’s getting squeezed, it’s probably not a good time to trade. Instead of acting on emotions, remember what got you to where you are in your investing journey—and where you’d like to be. If buying a stock that’s in squeeze territory doesn’t fall within your long-term objectives, you might want to step aside and not trade. Understand that when you’re dealing with a stock that’s being squeezed, you’re taking a big risk.

During that time, Volkswagen became one of the most valuable companies in the world as its share price increased to over EUR 1,005 per share or over $1,000 per share. Porsche benefited by reaping over $10 billion in profit, while short sellers lost billions of dollars over those couple of days. However, Volkswagen’s stock peak eventually came to an end, falling by almost 60% in a few short days. In spectacular situations, however, the stock may rise times in value, sometimes over just a few days. These situations are sometimes called the “mother of all short squeezes” and they can be tremendously lucrative for long investors and ruinous for short sellers. One of the most famous recent examples of a short squeeze was the massive rise of GameStop stock in 2021.

Just because there’s a lot of shorted shares doesn’t mean there will be a squeeze — the stock might perform exactly as expected. One notorious short squeeze occurred in early 2021, when traders in the subreddit WallStreetBets pushed up GameStop shares in an unheard-of way. On Jan. 29, just weeks after the Reddit post gained attention, shares closed at $325.

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But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher. Each day we have several live streamers showing you the ropes, and talking the community though the action. What we really care about is helping you, and seeing you succeed as a trader. We want the everyday person to get the kind of training in the stock market we would have wanted when we started out. Our chat rooms will provide you with an opportunity to learn how to trade stocks, options, and futures.

The elevated short interest had strapped a bomb around GME shares, and Reddit traders were ready to hit the detonator. You can pay attention to social media to look for short squeeze plays. The Reddit rumor mill often starts long before any meaningful move in a stock. The more shorts who cut losses and buy to cover positions, the bigger the squeeze. Suppose an imaginary company called Driverless is trading at $50 a share.

If you were short too early, it would have caused you some losses. However you choose to build generational wealth, the proper research https://1investing.in/ can steer you in the right direction. Download the Public app today to learn more ways to invest and save for retirement.