A short squeeze is a rapid increase in the price of a stock that occurs primarily due to technical factors in the market rather than underlying fundamentals. A short squeeze can occur when there is a lack of supply and an excess of demand for the stock due to short sellers covering (liquidating) their positions.
Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. Since covering their positions involves buying shares, the short squeeze causes a further rise in the stock's price. This newly increased price can in-turn trigger additional margin calls and short covering, which in turn may drive up the price further still in a vicious feedback loop. Short squeezes tend to happen in stocks that have expensive borrow rates. These expensive borrow rates can increase the pressure on short sellers to cover their positions, further adding to the reflexive nature of this phenomenon.
Buying from short sellers can occur if the price has risen to a point where shorts receive margin calls which they cannot (or choose not to) meet, forcing them to purchase stock to return to the owners from whom (via a broker) they had borrowed the stock in establishing their position. This buying may proceed automatically, for example if the short sellers had previously placed stop-loss orders with their brokers to prepare for this possibility. Alternatively, short sellers simply deciding to cut their losses and get out (rather than lacking collateral funds to meet their margin) can cause a squeeze. Short squeezes can also occur when the demand from short sellers outweighs the supply of shares to borrow, which results in the failure of borrow requests from prime brokers. This often happens with companies that are on the verge of filing for bankruptcy.
Short squeezes are more likely to occur in stocks with a small number of traded shares, often stocks with small market capitalization and small floats. Squeezes can, however involve large stocks and billions of dollars, as happened in October 2008 when a short squeeze temporarily drove the shares of Volkswagen on the Xetra DAX from €210.85 to over €1000 in less than two days, briefly making it the most valuable company in the world. Short squeezes may also be more likely to occur when a large percentage of a stock's float is short, and when large portions of the stock are held by people not tempted to sell.
- Short Squeeze
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