The Art of Squeezing Shorts: An Insightful Guide

Understanding Short Squeezes

A short squeeze occurs when short sellers are forced to cover their positions due to a rapid increase in the stock price. When you short a stock, you borrow shares and sell them, hoping to buy them back at a lower price later. If the price rises instead, you face unlimited losses as you must buy back the stock at a higher price. Short squeezes can lead to substantial losses as short sellers rush to close their positions.

How Does a Short Squeeze Work?

Short sellers are not given a specific timeline to close their positions, but brokers may require it. Thinly traded or heavily shorted stocks can trigger a short squeeze when many investors rush to close their positions simultaneously. Short squeezes can also happen naturally when unexpected news causes stock prices to surge.

Examples of Short Squeezes

An example of a short squeeze occurred with GameStop in early 2021, when traders on WallStreetBets drove up share prices. The stock's price soared from $17.25 to $483 in just a few weeks. Another example is when a company called Driverless received a key approval, causing its stock price to skyrocket and short sellers to panic.

Implications for Individual Investors

Short selling can be used for various reasons, but it comes with high risks and limited returns. Short squeezes, like the one experienced by GameStop, can lead to massive losses for short sellers while benefiting regular shareholders. To identify stocks vulnerable to a short squeeze, investors should look at metrics such as short interest and days-to-cover ratio.