Short Squeeze: What It Is, Examples & How to Scan For It

Short squeezes occur when a stock’s price rapidly increases, forcing traders who are betting against the stock to buy shares to cover their positions. Investors bet on a short squeeze by identifying and buying stocks that have indicators that a short squeeze may be imminent. Investors can also bet on a short squeeze by buying a stock with high short interest as it starts to rise. The initial increase in the stock price could lead to a short squeeze if it continues, sending the price higher and higher.

In other words, most of the times the company can just deny the rumors or allegations even if your conviction was right. This example about Valeant shows how the company kept denying rumors before eventually coming out in the open. But, before we get into the details of identifying a short squeeze, we need to understand the psychology behind shorting stocks. GME YTD daily chart — courtesy of StocksToTrade.comFor obvious reasons, the GME rally continues to be one of the best examples of a short squeeze.

Risks of a Short Squeeze

Buying stocks or options will expose you to the risk of losing all or more than all of your capital. For investment advice, please seek personal assistance from your financial adviser. All information provided «as is» without warranty, for informational purposes only – it is not Short Squeeze intended for trading purposes nor as advice. We will not be liable for any informational errors, incompleteness, delays, or for any actions taken in reliance on information contained herein. Data for stocks traded on the NYSE, NASDAQ, AMEX and OTC are delayed 20 minutes.

Of course, you can’t simply sell what you don’t own with no consequences — at some point, those borrowed shares have to be returned. When that day comes, the investor needs to buy shares in the market to be able to return them to the lender. If the investor is correct and the share price has indeed declined, let’s say to $70, then the investor will make $30 in profit. They sold borrowed shares for $100, repurchased them for $70, returned the shares, and pocketed the difference. When there’s a https://www.bigshotrading.info/, naked short selling essentially creates phantom shares, increasing liquidity in the shorted stock.

Short Squeeze Definition

In this case, your maximum loss is the amount you paid for the put option. Short-sellingShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen. Then-Porsche CEO Wendelin Wiedeking was charged with market manipulation but was acquitted by a Stuttgart court. A bear squeeze is a situation where sellers are forced to cover their positions as prices suddenly ratchet higher, adding to the bullish momentum. 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. When identifying stocks at risk of a short squeeze, two useful measures are short interest and the short interest ratio.