BROWSE

Short Squeeze

Definition

A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock.

By definition, a short squeeze is the position in the stock prices that prompts an increase which in return accelerates buying of stocks amongst short sellers. To close short positions, the short sellers buy stocks which reduce or eliminate their losses. This leads to a further increase in the prices of the stock, which invites a larger number of short sellers to save their positions.

Short Squeeze: How does it work?

The expected fall in the prices of the stock leads to a short sale of the stocks in the market. The investor basically borrows stocks/shares of a particular company from a legal broker. The shares are then sold at the market price rate. The investor does this in the hope of buying back the shares at a much declined rate in the long-term. Therefore, unlike the traditional classic buy first/then sell method, the investor sells high and buys at a lower price.

Short squeeze would occur when the stocks do not decline as predicted.

An Example:

Company ABC sells stock at $50. The price goes up to $55 instead of going down. It keeps on going higher. As an investor who shorted the stocks, this is bad news for you. Now you need to now cover your position, as well as eliminate the losses. Therefore, you buy Company ABC’s stocks and like you, many others do the same, thus increasing the buying pressure on the stock. This leads to increase in the already increased price.

Short squeeze: Why does it matter?

It has been deemed as a smart way by finance advisors and professionals to hedge a portfolio enjoy the declined market and exploit the knowledge of a certain stock. At the same time, it is an uncertain investment.

The concept of short squeeze is popular in small-cap stocks; however, they can occur in any stock. To take advantage of the short squeeze, the short term traders should enter the selling market if there are enough buyers. Furthermore, there is no guarantee that the stock will trade at higher, or move at lower. In an absolute market, the investor would want to trade in the direction of the (at the time) trend.


Further Reading


Go down fighting: Short sellers vs. firms
www.nber.org [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short SqueezeMarket Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze
papers.ssrn.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Go down fighting: Short sellers vs. firmsGo down fighting: Short sellers vs. firms
academic.oup.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Minsky and modern financeMinsky and modern finance
jpm.pm-research.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

The economics of treasury securities marketsThe economics of treasury securities markets
www.aeaweb.org [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Collateral and short squeezing of liquidity in fixed rate tendersCollateral and short squeezing of liquidity in fixed rate tenders
www.sciencedirect.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

The Short Squeeze: The'Invisible'Cost of Short SalesThe Short Squeeze: The'Invisible'Cost of Short Sales
papers.ssrn.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Multiple unit auctions and short squeezesMultiple unit auctions and short squeezes
academic.oup.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Short Squeeze Uncertainty and SkewnessShort Squeeze Uncertainty and Skewness
papers.ssrn.com [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …

Aggregate short interest and market valuationsAggregate short interest and market valuations
pubs.aeaweb.org [PDF]
… College, Carnegie Mellon, the Chicago Quantitative Alliance, the London School of Economics, the NASD … the author(s) and not necessarily those of the National Bureau of Economic Research … should buy stocks after an event occurs, in anticipation of a short squeeze (Section VI …



Q&A About Short Squeeze


What does a short squeeze do?

A short squeeze is the position in the stock price that prompts an increase which in return accelerates buying of stocks amongst short sellers.

How does one engage in short selling?

One engages by borrowing stocks and immediately selling them, hoping to buy them back later ("covering") at lower prices. As they were borrowed, sellers must eventually return them to lenders (plus interest and dividend if any) and therefore makes money if they spend less buying back the shares than they earned when selling them. However, an unexpected piece of favorable news can cause jump in the stock's share price, resulting in loss instead of profit. Sellers might then be triggered to buy shares they had borrowed at higher prices, trying not let their losses mount should share price rise further.

Why do investors engage in short selling?

Investors engage in short selling as it allows them to make money on falling prices and hedge against inflationary pressures.

What is a short squeeze?

A short squeeze is an increase in the price of a stock owing primarily to an excess of short selling rather than underlying fundamentals.

What is not guaranteed with this investment strategy?

There is no guarantee that the stock will trade higher than its current price after you have covered your position and eliminated losses.

What are some reasons for a short squeeze?

An unexpected piece of favorable news can cause a jump in the stock's share price, resulting in a loss rather than profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the share price rise further.

How does a short seller sell shares?

The investor basically borrows stocks shares of a particular company from a legal broker. The shares are then sold at the market price rate.

Who can take advantage of this concept?

Short term traders should enter the selling market if there are enough buyers.

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