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Short Squeeze

Glossary

A short squeeze happens when a heavily shorted stock suddenly skyrockets in price, forcing short sellers to buy back shares to cover their positions. This surge in buying pressure pushes the stock even higher, creating a feedback loop of rising prices and panicked short sellers scrambling to exit.

How a Short Squeeze Happens:

  1. High Short Interest → A large percentage of a stock's shares are being shorted.
  2. Unexpected Price Spike → Positive news, strong earnings, or a big investor buy-in causes the stock to rise.
  3. Short Sellers Get Trapped → As the stock rises, short sellers face margin calls and must buy back shares.
  4. Buying Frenzy → The forced buying from short sellers fuels even more upward momentum.

Real-World Short Squeeze Examples:

  • GameStop (GME) – 2021 → Retail traders on Reddit’s r/WallStreetBets squeezed hedge funds out of billions.
  • Volkswagen (2008) → Became the world’s most valuable company temporarily due to a squeeze.

How Traders Use Short Squeezes:

  • Momentum traders look for stocks with high short interest and rising prices to ride the wave.
  • Options traders buy out-of-the-money call options to profit from potential surges.

Short squeezes can create huge profits, but they also carry extreme risk since stocks often crash back down after the hype fades.