6. Short Squeeze

Short Squeeze: Why They Happen and How to Profit

A short squeeze is a trading term that happens when a stock that is heavily shorted all of a sudden gets positive news or some kind of catalyst which brings a lot of new buyers into the stock.

When this happens, the stock is being bought up and the shorts are now forced to cover their positions (getting squeezed out), which then results in more buying that can cause a stock to go up very quickly and by a lot.

You can find short information on stocks through most financial sites like Yahoo and Google Finance. They list the short interest and the percentage short of the float along with the short interest ratio.

The short interest ratio (SIR) measures the amount of shares short divided by the average daily trading volume.

So if the SIR is 3, then that means it would take 3 days at the average volume levels for shorts to buy back their shares. However, when a squeeze is underway the volume is usually increased by a lot so shorts could cover more quickly.

The important part to remember is that when a short squeeze is underway, you don’t want to be caught on the wrong side of it.

Why They Happen

Short squeezes often happen at the end of deep slumps, like the one we saw in March as coronavirus fears took hold. At such points most traders have already sold shares.

“In general, short squeezes are precipitated by large mark-to-market losses due to upward price movements of the shorted stock and/or high stock borrow financing rates which make it unprofitable to stay in trades for long periods of time,” says analyst Ihor Dusaniwsky of data firm S3 Partners.

Leave a Reply

Your email address will not be published. Required fields are marked *