Short Squeeze

A short squeeze occurs when a heavily shorted stock's price rises sharply, forcing short sellers to buy shares to close their positions and limit losses. This buying pressure drives the price even higher, forcing more short sellers to cover, creating a powerful feedback loop that can result in dramatic price spikes. The mechanics work as follows: Short sellers have borrowed and sold shares they must eventually return. As the stock price rises, they face mounting losses. At some point, the pain becomes unbearable, brokers may issue margin calls, or risk limits are breached. When shorts are forced to buy back shares, their purchasing adds to demand, accelerating the price increase. Short squeezes are most likely when a stock has high short interest (many shares sold short relative to the total available), low float (few shares available for trading), positive catalysts (good news or improving fundamentals), and determined buyers willing to push prices higher. The most famous recent short squeeze was GameStop in January 2021. Retail investors on Reddit noticed the extremely high short interest and coordinated buying to trigger a squeeze. The stock soared from about $20 to nearly $500 in weeks, causing billions in losses for short-selling hedge funds before eventually declining. Short squeezes can be incredibly profitable for long investors who own the stock but are generally unpredictable and often short-lived. The price typically collapses after the squeeze ends and shorts have covered. Buying during a squeeze is extremely risky - prices can reverse just as violently as they rose. For sophisticated investors, monitoring short interest data can identify potential squeeze candidates, though this data is released with a delay. The combination of very high short interest, positive news catalysts, and buying momentum can signal squeeze potential, though many heavily shorted stocks decline without ever squeezing.