![]() ![]() What causes a short squeeze?įrom the explanation above we can summarize the events leading up to a short squeeze scenario in the list below: This often gives rise to opportunistic investors trying to capitalize on the short squeeze by buying during the price ascension. ![]() When many short sellers attempt to buy back simultaneously, there is no cap on how high stock prices may rise. The chart below shows the relative price increase between Volkswagen AG and the German DAX index.Ĭhart prepared by Warren Venketas, Refinitiv ![]() The logic behind a short squeeze is that when short sellers (individuals forecasting share price declines) run losing negative positions due to price appreciation, the domino effect of these investors buying back shares to close positions as to not incur further loss causes an exponential rise in stock prices.Ī good example is the Volkswagen AG (VOW.DE) short squeeze of 2008 whereby Porsche purchased large volumes of Volkswagen shares driving up prices roughly fourfold ultimately causing short sellers to lose billions in the process. A few days later, Company Z shares rise to $10 per share which means that Investor A is currently running a $50 loss. The definition of a short squeeze can be termed as the strain experienced by short sellers to cover (by buying to close) their respective positions due to a sharp rise in stock prices.įor example, Investor A borrows 10 shares of Company Z at $5 per share. This article will outline the foundational concepts of the short squeeze while providing insight on how to manage and trade around this contentious financial market phenomena. The short squeeze has demanded the audience from many of the best investors and traders the world over, with some boastful about correct market predictions while others are humbled by the swift yet destructive nature that is the short squeeze. ![]()
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