What Is a Short Squeeze? The Motley Fool

The result was not only retail investors continued investments in GameStop stock and call options, but also a major increase in GameStop stock price in a matter of days. On January 27, 2021, GameStop’s share price rose to $347.21, with a brief peak of $483 per share. This squeezed out short sellers, such as major hedge funds, causing them to lose billions of dollars. The event continued to attract more notable figures like Elon Musk and venture capitalist Chamath Palihapitiya. If the stock price starts to rise instead of fall, short sellers face potential losses as they must eventually buy back the borrowed shares at a higher price.

Targets for short squeezes

• In early 2020, Tesla was shorted by investors betting on its failure, with 18% of its outstanding stock in short positions.
• In early March 2020, Tesla’s stock finally fell, along with most others, during a market downturn.
• GameStop’s stock price surged due to a short squeeze on major hedge funds that were short the stock and forced to sell to cut losses.
• Short squeezes occur when a highly shorted stock suddenly and quickly increases in price.
• Short interest is the total number of shares sold short as a percentage of total shares outstanding.

Short squeezes tend to happen in stocks that have expensive borrow rates. Expensive borrow rates can increase the pressure on short sellers to cover their positions, further adding to the reflexive nature of this phenomenon. Assume that because of the huge short interest, XYZ shares had declined from $15 a few months ago to $5. XYZ’s shares jump to $9, as speculators buy the stock and short sellers scramble to cover their short positions. Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher. The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented.

However, a Bloomberg reporter, Brandon Kochkodin, described a bull case for the potential of GameStop and predicted a turnaround for the company in a few years. On the flip side, short sellers purchase stock with the prediction that the stock price will decrease. At that point, they will enter what is called a short or short position. This all begs the question of how short sellers profit from a decrease in a stocks price. When the short interest indicates fewer short the 10 best places to buy bitcoin in 2021 revealed sales, it could mean that the price of the stock has risen too high, or that it has become too stable for short sellers to make a profit off of.

A stock’s short interest ratio is the total number of shares sold short divided by the stock’s average daily trading volume. Also called “days to cover,” the short interest ratio can tell an investor the number of days of normal trading needed for the trading volume to reach the point to buy back all the shares sold. A short squeeze is a rapid and unexpected price increase in a stock or other security, often triggered by factors such as high short interest, positive news, or sudden price increases. Short squeezes result from short sellers being forced to cover their positions, further fueling the price rise. Short sellers are the most directly affected by short squeezes, as they can face substantial losses due to rapidly rising stock prices. As short sellers scramble to cover their positions, they contribute to the buying pressure, further exacerbating their losses.

There is no hard and fast rule here, and opinions vary widely, but a decent rule of thumb is 10 days. Ten days or longer to cover might indicate a crowded trade, and one you might want to avoid lest you get squeezed. Another technical indicator that traders monitor is what is known as “days to cover.” It is a metric derived from comparing the total short-selling interest in a stock to its average daily trading volume. Margin Accounts.Margin investing increases your level of risk and has the potential to magnify your losses, including loss of more huge surge in britons investing in cryptocurrencies like bitcoin than your initial investment.

Popular indicators that are used to identify oversold areas include the relative strength index (RSI) and the Williams %R. If investors are using a short covering strategy with borrowed stock, they will need to buy back the shares which they have borrowed to open the short position before the expiration date arrives. The expiration date in a short cover is the date on which the borrower agrees to return the stock to the lender. Public Investing is a wholly-owned subsidiary of Public Holdings, Inc. (“Public Holdings”). 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 Public Investing is not registered.

What is a short position in stocks?

Index options have special features and fees that should be carefully considered, including settlement, exercise, expiration, tax, and cost characteristics. To learn more about options rebates, see terms of the Options Rebate Program. Rebate rates vary monthly from $0.06-$0.18 and depend on your current and prior month’s options trading volume. The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such.

When identifying stocks at risk of a short squeeze, two useful measures are short interest and the short interest ratio. GameStop – a struggling retail chain selling video games and accessories – shot higher by as much as 2,464% at the peak of its 2021 short squeeze in January. Even now, after several spurts and pullbacks, it remains up after a considerable pullback, it remains up 1,070%. A short squeeze is a quick path to getting a lot of juice out of a stock. Keep in mind that other fees such as regulatory fees, Premium subscription fees, commissions on trades during extended trading hours, wire transfer fees, and paper statement fees may apply to your brokerage account.

How to Trade a Short Squeeze

High-Yield Cash Account.A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds in your High-Yield Cash Account are automatically deposited into partner banks (“Partner Banks”), where that cash earns interest and is eligible for FDIC insurance. Your Annual Percentage Yield is variable and may change at the discretion of the Partner Banks or Public Investing. Apex Clearing and Public Investing receive administrative fees for operating this program, which reduce the amount of interest paid on swept cash. The relative strength index (RSI) measures the extent of price changes to determine overbought or oversold conditions in the stock market. To gain a better understanding of how a short squeeze works, let’s break down the process into steps.

According to analytics firm S3 Partners, GameStop short sellers lost over $1.3 billion in the initial May 2024 squeeze, with more losses on the horizon if the stock continues to pump. They don’t send bankrupt short sellers to prison anymore, but the obligation to buy the shares back is very real. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on 23000+ microsoft network engineer jobs in united states 456 new software development this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument.

In addition, a well-known investor, such as Scion Assets Managements owner Michael Burry, announced he had a long position in the company. The co-founder of Chewy, Ryan Cohen, also disclosed that he had a huge stake in the company. A short position occurs when a short seller sells a stock with the intention of buying it back later at a lower price for profit. When a short seller decides to sell the security, it’s called short selling. To understand the meaning of short squeeze 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.

What’s the difference between naked short selling and 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 earlier, short interest is the total amount of outstanding shares that haven’t been closed by short sellers. A high short interest, such as 20% or above, can be an indicator of a short squeeze. These factors make short squeeze trading highly unpredictable and best approached with caution.