What are the most famous recent short squeezes? Typically, when most of the short sellers are forced out of their positions, the stock usually plummets to its pre-squeeze levels. With the incremental rise in stock price, more and more short sellers succumb and are forced to take their losses by margin calls. This leads to a high buying pressure on the stock, which pushes the stock price even higher. When a short squeeze occurs, traders with short positions rush to close their positions and buy the stock at prevailing higher prices. However, for some heavily invested institutional short sellers, this isn't as easy as clicking a button. They have to decide whether to close their position quickly to cut their losses or wait for the price to drop, which entails an even higher risk as losses can mount if the price climbs further. This is the dilemma that short sellers face during a short squeeze. In contrast, you can cap your losses if you buy the stock back at a defined risk level. You could potentially wipe out your trading account. If you go with the first option, you could theoretically suffer unlimited losses if the price doesn't go lower. In other words, you first borrow the stock, sell it at a higher price, and then repurchase it later when the prices plummet to return it to your broker.īut what if your prediction regarding stock price goes wrong? What if you short a stock and its price, instead of dropping, starts rising rapidly? In such a case, you either have to wait for the price to drop to book a profit, or you can buy it at the current higher market price and limit your losses.
When you short sell a stock, you borrow it from your broker at the prevailing interest rate and sell it in order to repurchase it later at a lower price. For example, traders who predict that a stock will drop in value can short sell it to benefit from its falling prices. Heavily shorted stocks are vulnerable to short squeezes. How does a short squeeze work? What is short selling? Unfortunately, losses incurred from shorting can be infinite, compared to losses from buying, which can only go to zero. Generally speaking, it means that someone somewhere is blowing up their account. The term 'short squeeze' implies that traders with short positions are squeezed, forcing them to close their positions at undesirable prices and take on heavy losses due to a sudden and outrageous increase in stock price. The large influx of short sellers simultaneously closing their positions pushes up the demand for the stock and increases buying pressure, which catapults the stock even higher. When the stock price suddenly rises, the short sellers liquidate their positions to cut their losses. The short squeeze occurs when a relatively large number of traders hold short positions in a stock. If you already know what a short squeeze is, skip on down to " what happened in the vw short squeeze." What is a short squeeze?Ī short squeeze refers to an event in the stock market that abruptly increases the price of a stock or security without any significant change in its fundamentals.
In this article, we'll discuss what happened, explain what a short squeeze is, and how to search for potential short squeezes in the future. Only a few times in history has a stock rocketed that quickly and violently to jaw-dropping prices. The Volkswagen short squeeze of 2008 was epic.