Short Squeeze Meaning, Explained, Stocks Examples, What Is It?

This unexpected rise in the share price can signal to other short-sellers to exit the short, further driving the price up. Frantic buying can drive stock prices to rise out of control, squeezing the short-sellers out of their positions. So, when it comes to a squeeze, short sellers decide to repurchase the stock, sending it higher. Small-scale short squeezes may happen any time, for example, after a company reports earnings. 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. A short squeeze occurs when a stock moves higher and short sellers decide to cover their short positions or are forced to do so via margin calls.

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As these short sellers buy the stock, the price rises, potentially creating a situation in which more shorts have to cover. In conclusion, participating in short squeezes requires a balanced approach that considers the potential rewards, risks, and regulatory considerations. 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. 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.

One of the biggest short squeezes of all time: Volkswagen

Buying into a company in the hope of lassoing a rocketing price is speculative at best. In October 2008, amid the broader financial crisis that caused most every stock to trade down, Volkswagen’s stock continued to trade higher. Those who didn’t think a deal with Porsche would happen, or were buying Volkswagen stock to hedge another investment, shorted the automaker’s stock, assuming that its price would fall eventually. It’s important to note that buying pressure alone may not be a substantial indicator that a short squeeze will occur, but it may be used in support of other indicators. Now that we know how to define short squeeze and understand how it works let’s look at a notable example from history.

GameStop Short Squeeze (

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Moreover, it is important to set realistic expectations and avoid excessive risk-taking. Short squeezes can generate significant profits, but they can also result in substantial losses if not approached with caution. Establishing clear risk management strategies, setting stop-loss orders, and diversifying one’s portfolio are essential elements of responsible trading. Furthermore, the GameStop short squeeze triggered a broader conversation about the fairness and transparency of the financial markets. It raised questions about the role of social media platforms, the impact of online communities, and the potential for market manipulation.

The Volkswagen squeeze

Short selling involves borrowing shares from a broker and then selling them on the open market, with the intention of repurchasing the shares at a lower price in the future to return them to the lender. So, this trading approach occurs when traders believe that the price of a particular stock is overvalued or likely to decline, and engage in short selling as a way to profit from the anticipated drop in value. Such information is time sensitive and subject to change based on market conditions and other factors. You assume full responsibility for any trading decisions you make based upon the market data provided, and Public is not liable for any loss caused directly or indirectly by your use of such information.

• Even when the stock market crashed in 2008, Volkswagen’s stock price remained high.
• If a seller watches a stock’s short interest closely, they can often predict whether or not a short squeeze is imminent.
• A liquidity squeeze occurs when a financial event sparks concerns among financial institutions, such as banks, regarding the short-term availability of money.
• Any historical returns, expected returns, or probability projections are provided for informational and illustrative purposes, and may not reflect actual future performance.
• You must repay your margin debt regardless of the underlying value of the securities you purchased.

The higher the days to cover number is, the more prone the stock will be to a 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. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.

Some have suggested that Tesla has been subject to a years-long short squeeze, given its high short interest and massive overvaluation, relative to competition. The stock’s momentum built on itself, and by the end of the month the stock had soared to more than $120 intraday – up some 60 times in price from just months before. While high-profile squeezes get a lot of press when they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth.

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. The short interest ratio, also known as days to cover, is the stock’s total number of shares sold short divided by the stock’s average daily trading volume equal to the total number of days to cover or close the position. The short-interest ratio shows the average number of days needed to exit a short position.

An RSI below 30 means that the stock’s price will increase, which can signal a short squeeze. A high short interest means that a large number of outstanding shares have been sold short but not yet covered or closed. The higher the short interest percentage increases, the more likely a stock can be prone to a short squeeze. As mentioned above, short sellers believe that there will be a decrease in a stock or securities price. If the short seller’s prediction is correct, they will profit by pocketing the difference between the price they sold the stock for and the price they bought it back for. During this time, day trading and individual investing had increased, and the news of this potential bull case had circulated.

• 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.
• There are instances where the stock price had fallen when they were heavily shorted.
• The bonds in your Bond Account will not be rebalanced and allocations will not be updated, except for Corporate Actions.
• Buyers can have long positions, which means they actually purchase and own the stock that they believe will increase over time and benefit their portfolio.
• You should consult your legal, tax, or financial advisors before making any financial decisions.

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There are instances where the stock price had fallen when they were heavily shorted. So, this risk is always there for investors who intend to profit from a short squeeze situation. 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. 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.

Movie theater company AMC Entertainment Holdings Inc. and brick-and-mortar retailers like Express and Bed Bath & Beyond have been recent short-squeeze targets since 2021. Short squeezes can be exciting, especially if you own the stock before it rockets higher, though many short squeezes are relatively modest. Still, it’s important to understand that no one knows when a short squeeze will end.