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. A short squeeze occurs when a surge in buying activity forces short sellers to panic and cover their positions by buying back the shares they borrowed. This rush to buy drives the stock price even higher, leading to a self-reinforcing cycle that can result in significant losses for short sellers and substantial gains for those on the other side of the trade. A short squeeze is a rapid and unexpected price increase in a stock or other security, often triggered by factors such as high short interest, positive news, or sudden price increases.

Risks of trading in a short squeeze

However, an unexpected piece of favorable news can cause a jump in the stock’s share price, resulting in a loss rather than a profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the how to buy veritaseum share price rise further. When a heavily shorted stock starts showing up in the media or receives an analyst upgrade out of the blue, it attracts new attention from investors. Positive coverage from respected outlets or favorable comments from analysts can trigger buying interest, particularly in stocks with a high level of shorts.

Commission-free trading refers to $0 commissions charged on trades of US listed registered securities placed during the US Markets Regular Trading Hours in self-directed brokerage accounts offered by Public Investing. Keep in mind that other fees such as regulatory fees, Premium subscription fees, commissions on trades during extended trading hours, wire transfer fees, and paper statement fees may apply to your brokerage account. Buyers can have long positions, which means they actually purchase and own the stock that they believe will increase over time and benefit their portfolio. Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. One of the best ways to keep on ethereum mining profitability 2020 top of the data you need to successfully short squeeze a stock is with InvestingPro.

Those who didn’t think a deal with Porsche would happen, or were buying Volkswagen stock to hedge another investment, shorted the automaker’s stock, assuming that its price would fall eventually. For wealth managers, understanding the dynamics of short squeezes is essential for effective portfolio management and risk mitigation. Past performance does not guarantee future results and the likelihood of investment outcomes are speculative in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Candor Financial LLC is not registered. A rise in short interest above the norm indicates that investors have become more bearish. But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher.

The co-founder of Chewy, Ryan Cohen, also disclosed that he had a huge stake in the company. This creates what is referred to as a stock squeeze or a squeeze from the pressure of short sellers being forced to exit the position. They don’t send bankrupt short sellers to prison anymore, but the obligation to buy the shares back is very real. In 2008, Porsche, a German automobile manufacturer, quietly acquired a significant stake in Volkswagen. As Porsche’s stake in Volkswagen continued to increase, it caught many investors and hedge funds off guard. These 12 best bitcoin wallets in the uk 2021 investors, who had taken substantial short positions in Volkswagen stock, were suddenly faced with a squeeze they did not anticipate.

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But with naked short selling, you skip the borrowing step and sell shares you don’t actually own. It’s a legitimate trading strategy, especially for those experienced in managing high-risk trading. However, to borrow shares from a broker, you need a margin account, which acts as collateral for the loan.

Risks Of Short Selling

By the end of 2008, the stock’s price was basically back to where it started before the squeeze. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Ask a question about your financial situation providing as much detail as possible. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

  • This approach opens up opportunities but comes with risks, including margin requirements, potential for unlimited losses, and strict regulations.
  • The bonds in the Bond Account have not been selected based on your needs or risk profile.
  • However, in mid-May of that year, the stock suddenly skyrocketed once again after Keith Gill, also known as “Roaring Kitty,” resurfaced on social media after a three-year hiatus.
  • If you see IV spiking on a heavily shorted stock, this is a pretty good sign that traders are expecting action—and you might be on the verge of a short squeeze.
  • It occurs when a security has a significant amount of short sellers, meaning lots of investors are betting on its price falling.

This phenomenon is often triggered by factors such as high short interest, positive news, or sudden price increases, resulting in further buying pressure and accelerated price appreciation. Wealth managers can also leverage the opportunities presented by short squeezes, such as buying into stocks that are experiencing rapid price increases or initiating long positions in stocks with high short interest. Another factor contributing to short squeezes is positive news or a shift in market sentiment. This could be related to better-than-expected financial results, new product announcements, or positive developments in the company’s industry. Assume that because of the huge short interest, XYZ shares had declined from $15 a few months ago to $5. XYZ’s shares jump to $9, as speculators buy the stock and short sellers scramble to cover their short positions.

When a stock’s price starts to rise rapidly, short sellers want out because they only profit when the stock goes down. Their pain, however, can be a short squeezer’s gain if they use the right day trading platform. A short squeeze situation arises when short sellers have to buy back their shares, given the constantly rising market prices. On the contrary, a gamma squeeze involves market makers betting on stocks when they observe multiple call options purchases for a particular stock by traders. The sudden change in investor sentiments happened due to Porsche’s announcement that it had expanded its voting shares in Volkswagen to 74%.