Given that short squeezes can create those kinds of gaudy returns, it’s worth reviewing what exactly a short squeeze is. This is mostly done by institutional investors, like hedge funds, given the risks and the margin required. In 2021, we saw a number of stocks make truly staggering jumps, doubling in price on consecutive days. There are several factors that contributed to these gargantuan moves, but one is surely the classic short squeeze. Let’s examine a few recent examples of short squeezes that have made the news and are a common topic of conversation for beginning investors.
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Short Squeeze Examples
The bullish catalyst can come from news or from an earnings report, but it can also be foreshadowed by technical indicators. Momentum indicators like RSI, MACD, and stochastics can be extremely valuable in trying to predict whether and when a Short Squeeze will develop.
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AMC Theaters (NYSE: AMC): Short Squeeze Example
GameStop, a retail gaming company, was affected by a decrease in mall foot traffic, the pandemic, and competition. Naturally, short sellers had grown interested in the stock’s decline. However, a Bloomberg reporter, Brandon Kochkodin, described a bull case for the potential of GameStop and predicted a turnaround for the company in a few years. For example, let’s https://www.bigshotrading.info/ 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.
- Short squeeze meaning implies the squeezing out of the short-sellers, given the rapidly and unexpectedly rising prices.
- Short squeezes and genuine breakouts will unfold differently in the long run.
- It’s the practice of selling short shares that have not been affirmatively determined to exist.
- This reiterates that consistently making money trading stocks is not easy.
Borrow, buy and sell timing can lead to more than 100% of a company’s shares sold short. This does not necessarily imply naked short selling, since shorted shares are put back onto the market, potentially allowing the same share to be borrowed multiple times. Days to cover, also known as the short interest ratio, is calculated by taking a stock’s total number of shares sold short and dividing that number by the stock’s average daily trading volume. For example, if a stock has 1 million shares sold short and its average daily trading volume is 100,000 shares, then the days to cover would be 10 days. That is, it would take 10 days for short sellers to cover their entire short position based on the average daily volume of shares traded.
What Is a Short Squeeze?
For a short seller, when the price of the stock falls, it lets the short seller buy the stock at a lower price than the price at which it was sold. The acquired stock is used to settle outstanding debt, and the short seller pockets the difference between the initial sale price and the purchase price. A short squeeze is triggered when the price of a heavily-shorted asset receives unexpected positive news and the price of the stock goes up. If you’re interested in learning more about the short squeeze phenomena, how you can predict short squeezes and the pros and cons of this type of investment, our beginner’s guide is an excellent place to begin. If you see a sudden uptick in the overall number of shares bought, this could be a warning sign of a pending short squeeze.
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What Is A Short Squeeze And What Is Going On In GameStop, AMC
During this time, day trading and individual investing had increased, and the news of this potential bull case had circulated. There was also heightened interest in GameStop in spaces such as WallStreetBets , which had pegged GameStop as an undervalued stock for some time. WallStreetBets was the driving force behind the increase in GameStop’s stock value.
- Shorting a stock involves borrowing the stock, usually from a broker, and selling it now in hopes of buying it back later for less in order to make a profit.
- It’s important to understand the risks with any investment strategy, but most importantly, how short and long positions in stocks can be a benefit or detriment to your investment portfolio.
- When it comes to short selling and short squeezes, there are a couple of important data points to monitor.
- The increase of maintenance margin means more funds must be transferred immediately or the short position must be trimmed down, by buying shares to cover.
- Always play out worst case scenarios and implement stop-losses ahead of time.
Medicom’s shares jump to $9, as speculators buy the stock and short sellers scramble to cover their short positions. Short sellers zero in on a stock that they think is overvalued by the market. For example, Tesla Inc. captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles.