Glossary · Funds and derivatives

Short squeeze

A short squeeze is a sudden jump in a stock’s price that forces short sellers to buy it back, and their buying pushes the price even higher.

Also called: squeeze, gamma squeeze, short covering

In plain words

Short sellers borrow shares and sell them, hoping to buy them back cheaper later and keep the difference (short selling). Their loss grows with every dollar the price rises, and in theory it has no limit.

If a heavily shorted stock starts rising, some short sellers give up and buy the shares back to stop the losses. Others get margin calls and are forced to buy. All that buying pushes the price up further, which squeezes the next group of short sellers. That loop is a short squeeze.

Squeezes are most violent when a large share of a company’s available stock has been sold short, so there are few shares for everyone trying to buy back at once.

The squeeze feeds itself: every short seller who buys back pushes the price up for the rest.

Example

Why short sellers panic

You short 100 shares at $20: you receive $2,000 and owe 100 shares back.
The price falls to $15: buy back for $1,500, profit $500. The most you could ever make is $2,000, if the price went to zero.
The price rises to $60: buying back costs $6,000, a loss of $4,000, twice what you received.
At $200 the loss would be $18,000. There is no ceiling, which is why short sellers rush for the exit when a stock takes off.

A buyer’s loss is capped at what they paid; a short seller’s is not. That asymmetry is the fuel of a squeeze.

One level deeper

In October 2008 Porsche revealed that it controlled about three quarters of Volkswagen’s voting shares, mostly through options, while the state of Lower Saxony held a fifth. Very few shares were left to buy, and short sellers scrambled. For a day or two Volkswagen was the most valuable company in the world.

In January 2021 GameStop, a video-game retailer whose sold-short shares exceeded its whole public float, rose from under $20 to an intraday high of $483 in a few weeks, pushed by small investors on social media. Some hedge funds that had shorted it lost billions.

Options can add fuel. When many people buy call options, the dealers who sold them buy the shares to hedge, and buy more as the price rises: a “gamma squeeze”. Watchers measure the risk of a squeeze with short interest (shares sold short as a share of the float) and days to cover (short interest ÷ average daily volume).

Why it matters

Squeezes produce some of the most extreme price moves in markets, unconnected to the company’s business.

They show how leverage and forced buying can move prices as much as forced selling does in a crash.

Prices pushed up by a squeeze usually fall back once the short sellers are out, so late buyers often lose.

A common mistake

Myth: A squeezed stock went up because the company got better.

In fact: A squeeze is about who is forced to buy, not about the business. Once the short sellers have covered, the forced buying stops, and prices have often fallen most of the way back.

Questions people ask

What causes a short squeeze?

A rising price in a heavily shorted stock: good news, a wave of buyers, or a call-option frenzy. Short sellers buying back to limit losses, or because of margin calls, push the price higher still.

How do you know if a stock may be squeezed?

Analysts watch short interest as a percent of the float and days to cover. High numbers mean many short sellers would need to buy at once. They do not tell you when, or whether, a squeeze will happen.

What was the GameStop short squeeze?

In January 2021 heavy buying by small investors and call options pushed GameStop shares from under $20 at the start of the month to a peak of $483 on January 28, forcing short-selling funds to cover at huge losses. The prices are before the 4-for-1 split of 2022.

About the numbers

This page explains a term. It is not investment advice.