What Is a Short Squeeze?

In the event of a short squeeze, short-sellers who haven’t borrowed the shares they shorted will fail to deliver those shares because they don’t exist. Saunders was angry that investors were betting against his company, so he started buying up as many shares as he could in an attempt to trigger a short squeeze. Saunders owned 99% of Piggy Wiggly’s stock by March 1923, which meant short-sellers would have had to buy from him to cover their positions. Public Investing is a wholly-owned subsidiary of Public Holdings, Inc. (“Public Holdings”). This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Public Investing is not registered. Apex Clearing Corporation, our clearing firm, has additional insurance coverage in excess of the regular SIPC limits.

But then TSLA rallied again and split its shares, and its addition to the SPX became a reality, illustrating that a short squeeze doesn’t always have to end badly. Other stocks that were caught up in short squeezes haven’t always fared so well, in part because they didn’t have the fundamental support. Because you can’t sell something you don’t own, shorting requires the seller to “borrow” the stock (and pay interest to the stock lender), then sell it. Locating the shares can sometimes be difficult for your clearing firm because of high demand or a small number of outstanding shares. The stock market crash of 1929 caused a financial frenzy in the United States. The first bank runs occurred in the fall of 1930 in Nashville, when account holders rushed to withdraw all of their funds at once from the bank.

1. Plans are not recommendations of a Plan overall or its individual holdings or default allocations.
2. Instead, the long squeezes were quickly met with stock buys, meaning that the dips were caused by panicked shareholders taking profits and cutting losses.
3. The term “squeeze” is used to describe a variety of financial and business situations, typically involving some sort of market pressure.
4. A high volume of investors who are shorting a stock and racing to exit their positions at the same time creates a short squeeze.
5. The higher the short interest, the more a specific stock is viewed by investors to have a negative outlook.
6. There is considerable skepticism among investors about whether this drug will actually work.

The Volkswagen short squeeze had significant consequences for the market and investors. The stock price surged over a few days, rising more than tenfold, making Volkswagen briefly the most valuable company in the world by market capitalization. Many hedge funds and institutional investors suffered substantial losses as they were caught in the short squeeze and struggled to cover their positions. A gamma squeeze differs from a short squeeze because it involves the options market. A gamma squeeze forces investors to buy shares because of open options positions on the stock.

Quickly, this credit squeeze spread across the U.S., causing many banks to liquidate their loans to appease their depositors, leading to multiple bank failures. New York’s Bank of the United States had more than $200 million in deposits at the time when it collapsed in 1931, making it the largest bank failure in American history up to that time. A liquidity squeeze occurs when a financial event sparks concerns among financial institutions, such as banks, regarding the short-term availability of money.

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Sellers of naked call options see their potential loss increase as the stock price rises. They can hedge their position by purchasing the stock at any time before the option is exercised, which converts their naked calls into covered calls. Treasury Accounts.Investing services in treasury accounts offering 6 month US Treasury Bills on the Public platform are through Jiko Securities, Inc. (“JSI”), a registered broker-dealer and member of FINRA & SIPC. See JSI’s FINRA BrokerCheck and Form CRS for further information.JSI uses funds from your Treasury Account to purchase T-bills in increments of $100 “par value” (the T-bill’s value at maturity).

What is a long position?

The result was not only retail investors’ continued investments in GameStop stock and call options, but also a major increase in GameStop’s stock price in a matter of days. On January 27, 2021, GameStop’s share price rose to $347.21, with a brief peak of $483 per share. This squeezed out short sellers, such as major hedge funds, causing them to lose billions of dollars. The event continued to attract more notable figures like Elon Musk and venture capitalist Chamath Palihapitiya. During the 2008 financial crisis, Porsche Automobile Holding SE (POAHY), already a major holder of Volkswagen AG (VWAGY) shares, increased its total stake in Volkswagen to about 75%.

Transitioning from how a short squeeze operates to understanding its implications, it’s noticeable that short squeezes can lead to considerable price swings. This is very important to anyone who has a vested interest in the stock as they could lose or gain significantly from the situation. These fluctuations don’t only affect the specific stock but the broader market indices as well, potentially attracting regulatory attention. This normally happens because investors place a stop-loss order to mitigate risk and ensure they are protected against any price declines. Companies valued between $100 million and $8 billion (known as small-cap stocks) are good candidates to be shorted, as are stocks with high short interest, or a high percentage of stock shares held by short-sellers. But if it’s not, short sellers can face runaway losses as the expiration date on their positions approaches.

Short Squeeze: What It Is & How It Works

These case studies provide real-life examples of how short squeezes can unfold, the factors that contribute to their occurrence, and the consequences they can have for both the market and investors. The best-case scenario is that the price falls, so the short-seller can buy the shares for a lower price than what they sold them for when they borrowed them. For example, let’s say ABC stock has been creating a buzz in the stock market, causing buyers to invest in the stock because of its good performance and their prediction that it will continue to increase. On the contrary, it has also sparked interest in short sellers, who are predicting that ABC’s stock value will eventually decrease, and it’s only on a temporary upward trend. Tactics like setting stop-loss orders, which essentially instruct a broker to sell a stock once it reaches a certain value or maintaining a diversified portfolio can help mitigate risks. Proactively staying informed can also shield investors from the risks of short selling and possibly leverage market volatility to their benefit.

That caused fears of a domino effect in which other banks would fail, creating a nationwide credit squeeze. The federal government quickly stepped in to assure depositors that their money was safe, even beyond normal Federal Deposit Insurance Corporation limits, which appeared to defuse the situation. To capitalize on that, they borrow shares from a broker, then sell them at the current price. When the stock price falls, they buy the shares at the lower price, return them to the broker and pocket the difference.

What Is Short Selling? Copied Copy To Clipboard

Short squeezes can be exciting, especially if you own the stock before it rockets higher, though many short squeezes are relatively modest. Still, it’s important to understand that no one knows when a short squeeze will end. Meme stocks, or stocks with viral internet cultural support, have been targets of ongoing short squeezes, starting with GameStop Corp. in 2021. Movie theater company AMC Entertainment Holdings Inc. and brick-and-mortar retailers like Express and Bed Bath & Beyond have been recent short-squeeze targets since 2021. Moreover, it is important to set realistic expectations and avoid excessive risk-taking.

Example of a Short Squeeze

Squeeze situations are often accompanied by feedback loops that can make a bad situation worse due to market psychology. Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs.

Great Depression Credit Squeeze

Short squeezes can generate significant profits, but they can also result in substantial losses if not approached with caution. Establishing clear risk management strategies, setting stop-loss orders, and diversifying one’s portfolio are essential elements of responsible trading. Additionally, staying informed about market news, financial reports, and regulatory developments is crucial.