What is a Short Squeeze?
A short squeeze is an event in the stock market that causes the price of a stock to soar in value once short sellers buy back borrowed shares to cover their position. When a stock goes up, short sellers lose money and must buy the stock back to return their borrow shares, which sends the stock price skyrocketing.
How Short Squeeze Works
A short squeeze works in the following steps:
- Short sellers borrow shares from a broker with the intent to sell the stock on the market and buy it back cheaper.
- The shorts sell their shares and wait for the price to dip lower so they can buy back the stock lower and return their shares while pocketing the difference.
- Buyers come in and add buying pressure to the stock, which sends the price higher.
- To minimize losses, short sellers add more buying pressure to the stock and the stock price along with volume jumps substantially.
How Long Do Short Squeezes Last?
It really depends on how long it takes for short sellers to cover their position and return their borrowed shares. A short squeeze could last as long as 1 or 2 days or even much longer depending on the short interest and number of remaining borrowed shares.
Popular Short Squeeze Examples – AMC & GME
In January 2021, there was an epic short squeeze caused by retail traders that sent shares of AMC & GME stock to the moon. Short sellers lost billions of dollars when savvy retail investors noticed the short interest on AMC Entertainment (AMC) and Gamestop (GME) almost exceeded the entire share float.
These smart traders gathered together on Reddit Wall Street Bets and told each other to buy up shares of AMC & GME to cause a short squeeze. Volume started picking up and AMC & GME stock went soaring. At one point, AMC stock was trading at $20 and GME stock was trading at over $300. Both stocks would have gone higher if Robinhood and other brokers didn’t step in and restrict buying on popular meme stocks like AMC, GME, KOSS and a few others.
Robinhood deleted the buy button because their clients like Melvin Capital lost billions of dollars during the January Squeeze. Robinhood needed the price of AMC & GME stock to fall so their hedge fund clients could cover their positions and avoid bankrupty.
How to Find Short Squeeze Stocks
I publish an updated article revealing the best short squeeze stocks with high short interest so be sure to bookmark that page and visit it regularly.