Short Squeeze

On Jan. 29, just weeks after the Reddit post gained attention, shares closed at $325. There’s the “short percentage of the float” – that’s the percent of the shares available for trading that are currently being held short. At one point, more than 100% of GameStop’s float was sold short – an excessively high number meaning that every share available was borrowed at least once to be sold short, but some were borrowed multiple times. When it comes to short selling and short squeezes, there are a couple of important data points to monitor. Short squeezes only happen when a lot of traders have shorted the same stock. Given that short squeezes can create those kinds of gaudy returns, it’s worth reviewing what exactly a short squeeze is.

The Structured Query Language comprises several different data types that allow it to store different types of information… From equities, fixed income to derivatives, the CMSA certification bridges the gap from where you are now to where you want to be — a world-class capital markets analyst. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.

Who loses and who benefits from a short squeeze?

One is the short interest – the percentage of a stock’s total number of shares that are currently held by short sellers. 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.

Short Squeeze

GameStop, a retail gaming company, was affected by a decrease in mall foot traffic, the pandemic, and competition. Naturally, short sellers had grown interested in the stock’s Short Squeeze decline. 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.

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

The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented. When a stock is thinly traded or heavily shorted, this can trigger a short squeeze, as many investors have to close out their positions at once. When you short a stock, you’re essentially borrowing shares using a margin account. You then immediately sell the borrowed shares in hopes that the share price will drop.

What usually happens after a short squeeze?

Understanding Short Squeezes

Eventually, the seller will have to buy back shares. If the stock's price has dropped, the short seller makes money due to the difference between the price of the stock sold on margin and the reduced stock price paid later.

Here’s how a short squeeze works, how it happens and the risks of trading during a squeeze. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. It’s important to always do your homework, and remember it’s never wise to go all in. A stock that’s in a short squeeze may still have a long way to climb, and if you don’t think the fundamentals support higher prices, then perhaps you should look elsewhere. If you’re buying a stock that seems to be in the throes of a short squeeze, especially at high levels, it helps to understand other potential reasons why the stock might be moving.

Examples of Short Squeezes

In early March 2020, Tesla’s stock finally fell, along with most others, during a market downturn. However, the stock eventually bounced back, leaving Tesla short sellers collectively nursing losses of more than $40 billion during the course of 2020.

Contrarian investors also watch a stock’s short interest; contrarians choose to buy stocks with a heavy short interest in order to exploit a future This is also risky, as the short sellers might be correct and the stock will plummet in price. However, if a short squeeze occurs, then contrarians have the opportunity to make money off of the short sellers needing to repay their borrowed shares. SIR is a comparison of short interest to average daily trading volume. It represents the theoretical number of days, given average trading volume, short-sellers would need to exit their positions. The higher this number, the more likely a short squeeze is coming. Both short interest and SIR are on stock quote and screener websites such as FinViz.

Bed Bath & Beyond Faces Delisting On Missed Nasdaq Deadline; Are Meme Stocks A Buy?

An enthusiastic tweet from Elon Musk cheered on the squeeze, and the next day, a wave of new retail investors jumped into the trade, buying more stock and call options. The heightened demand drove out more short sellers and pushed GameStop’s stock to an all-time intraday high of $483.

You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines. Savannah Hanson is an accomplished writer, editor and content marketer.

Leave a Reply

Your email address will not be published. Required fields are marked *