There was ample speculation that Porsche would buy the rest of Volkswagen. Anyone who buys in hopes of a short squeeze should have other reasons to think that the price of the stock will go higher. A positive news story, a product announcement, or an earnings beat that excites the interest of buyers can defeat a short position. If you short a stock at $10, it can’t go lower than zero, so you can’t make more than $10 per share on the trade. You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million. The first table shows data on stocks for the first week of the year from 2018 to 2021, with the first three columns consisting of those with high short interest broken down by returns from the year before.

Short sellers run the risk of losing a substantial amount of money if their prediction of a stock price decrease reverses and, instead, increases. That’s because shorting a stock is usually riskier than buying one. When you short an asset, you are using borrowed money, meaning that you can lose more money than what you shorted in the first place. Short InterestShort interest refers to the number of shares sold short but not yet purchased back by the short-sellers. The Short Squeeze Screener and Leaderboard uses an advanced quantitative model to track companies that have the highest likelihood of experiencing a short squeeze.

Tips for Trading a Short Squeeze

If you see a sudden uptick in the overall number of shares bought, this could be a warning sign of a pending short squeeze. Yes, you’re betting against yourself, in a way, but at least you lessen the damages of the losses and benefit from the price appreciation. This forces even more short-sellers like yourself into a tighter vise. You have the same choices as above, only the stakes keep mounting, and so do your potential losses. 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.

• However, it is necessary to know that there are also some methods to detect and exploit these squeeze situations.
• This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Open to the Public Investing is not registered.
• The more short sellers that sell, the more the short squeeze is exacerbated.
• When trading with leverage, this magnifies the extent of losses.
• As you know, historical movements and returns are not indicative of future gains or market movement.

Morgan online investingis the easy, smart and low-cost way to invest online. However you choose to build generational wealth, the proper research can steer you in the right direction. Download the Public app today to learn more ways to invest and save for retirement. In this case, if there is a short squeeze, the trade will be stopped automatically when it hits $13. After conducting some analysis, you forecast that the company’s real value is $5 per share, so you decide to short it. As a day trader, you can avoid these long term issues by looking at the short term details of an asset. True to his prediction, the company is one of the largest in the world today, and he has made billions of dollars from it.

What’s a Short Squeeze and Why Does It Happen?

However, these investors were not aware that Porsche SE had been quietly buying almost all freely traded ordinary Volkswagen shares in an attempt to take over the company. RSI indicates overbought or oversold conditions in the market on a scale of 0 to 100. Any RSI below 30 signals an imminent price rise, which could lead to a short squeeze.

• Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher.
• Also, looking at the Volkswagen chart above, notice the price went down nearly as fast as it went up.
• Days to cover measures the expected number of days needed to close out a company’s shares outstanding that have been shorted.
• Nothing on this website constitutes, or is meant to constitute, advice of any kind.

The higher the days to cover number is, the more prone the stock will be to a https://www.bigshotrading.info/. 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. As short sellers begin to exit their positions, it adds more buying pressure in the market, which can cause the price to rise even higher, forcing more short sellers to cover their positions. 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.

Hedge Fund Losses

Identifying a Short Squeeze can be relatively simple—after the fact. The trick is to identify the conditions that could lead to a squeeze ahead of time, and then determine how you might want to play it . When forces align, a stock’s price can rocket higher — fueled by those who bet it would drop. Cory is an expert on stock, forex and futures price action trading strategies. Third-party data has been obtained from sources we believe to be reliable; however, its accuracy, completeness, or reliability cannot be guaranteed. Candor does not receive compensation to promote or discuss any particular Company; however, Candor, its employees and affiliates, and/or its clients may hold positions in securities of the Companies discussed.

The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders. At a minimum, these studies indicate at least 50% of aspiring day traders will not be profitable. This reiterates that consistently making money trading stocks is not easy. Day Trading is a high risk activity and can result in the loss of your entire investment. You need to familiarize yourself with the short interest ratio , which measures the number of shares short divided by the average daily trading volume of the stock that interests you. So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze.

GME Short Squeeze Example

The short squeeze phenomenon is evident when the prices of the assets and securities have constantly been dropping for a significant period. As the stock and asset prices increase suddenly, more and more short sellers try cutting losses by buying back their sold shares.

A short squeeze happens when many investors short a stock but the stock’s price shoots up instead. Chart showing the price movement and volume during the 2008 short squeeze of Volkswagen shares. Short, or shorting, refers to selling a security first and buying it back later, with anticipation that the price will drop and a profit can be made. A rise in short interest above the norm indicates that investors have become more bearish. But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher. Every buying transaction by a short seller sends the price higher, forcing another short seller to buy.

Seven Principles of Investing

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 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. The computation indicates the theoretical number of days, assuming average trading volume, that it will take for those who sold short to cover – exit – all of their positions.

• Borrow, buy and sell timing can lead to more than 100% of a company’s shares sold short.
• As recently as September 2020, GameStop traded for less than $2 a share (split-adjusted).
• However, many factors can lead to a stock’s value going up instead, whether in a temporary or permanent way.
• While the data above isn’t entirely convincing, I think there’s enough there to warrant keeping an eye on some stocks.
• The term “short squeeze” refers to the pressure short sellers face to cover their positions following a sharp price increase in a stock they purchased.
• As mentioned earlier, short interest is the total amount of outstanding shares that haven’t been closed by short sellers.
• The event continued to attract more notable figures like Elon Musk and venture capitalist Chamath Palihapitiya.