Short Squeeze

Verified Timeline

Lore & Background

Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. This raises the price of the shorted stock, triggering more short sellers to cover by buying the stock, creating a cascade of purchases and an even bigger jump in share price. Borrow, buy and sell timing can lead to more than 100% of a company's shares sold short. Short squeezes tend to happen with stocks that have expensive borrow rates, which can increase pressure on short sellers to cover their positions. Buying by short sellers can occur if the price rises to a point where shorts receive margin calls they cannot meet, triggering them to purchase stock. This buying may proceed automatically if short sellers had placed stop-loss orders. Short sellers simply deciding to cut their losses can also cause a squeeze. Short squeezes can also occur when demand from short sellers outweighs the supply of shares to borrow, resulting in failure of borrow requests from prime brokers. This sometimes happens with companies on the verge of filing for bankruptcy.

In Their Own Story

In May 1901, James J. Hill and J. P. Morgan battled with E. H. Harriman over control of the Northern Pacific Railway. By the end of business on May 7, 1901, the two parties controlled over 94% of outstanding Northern Pacific shares. On May 8, it became apparent that uncommitted NP shares were insufficient to cover the outstanding short positions, and neither Hill and Morgan nor Harriman were willing to sell. This triggered a sell-off in the rest of the market as NP shorts liquidated holdings to raise cash to buy NP shares. The ensuing stock market crash was known as the Panic of 1901. In October 2008, a short squeeze triggered by an attempted takeover by Porsche temporarily drove the shares of Volkswagen AG on the Xetra DAX from €210.85 to over €1,000 in less than two days, briefly making it the most valuable company in the world. In 2012, the SEC charged Philip Falcone with market manipulation in relation to a short squeeze on bonds issued by MAAX Holdings. In November 2015, Martin Shkreli orchestrated a short squeeze on failed biotech company KaloBios that caused its share price to rise by 10,000% in just five trading days. The GameStop short squeeze, starting in January 2021, was primarily triggered by the Reddit forum WallStreetBets, leading to an all-time intraday high of US$483 on January 28, 2021. In March 2022, a short squeeze was initiated on nickel contracts on the London Metal Exchange, causing LME nickel prices to rise by around 250 percent.

Reader's Guide

Short squeezes are more likely to occur with listed stocks with relatively few traded shares and commensurately small market capitalization and float. Squeezes can, however, involve large stocks and billions of dollars. Short squeezes may also be more likely to occur when a large percentage of a stock's float is short, and when large portions of the stock are held by people who are not tempted to sell. Short squeezes can also be facilitated by the availability of inexpensive call options on the underlying security because they add considerable leverage. Typically, out of the money options with a short time to expiration are used to maximize the leverage and the impact of the squeezer's actions on short sellers. Call options on securities that have low implied volatility are also less expensive and more impactful. The opposite of a short squeeze is the less common long squeeze. A squeeze can also occur with futures contracts, especially in agricultural commodities, for which supply is inherently limited. The sale of naked call options creates a short position for the seller, in which the seller's loss increases with the price of the underlying asset and is therefore potentially unlimited. The resulting upward pressure on the price of the underlying can develop into a positive feedback loop, as call-sellers react to the rising price by buying the underlying to avoid exposure to the risk that its price may rise further.

Did You Know?

• In May 1901, the Panic of 1901 was triggered when James J. Hill, J. P. Morgan, and E. H. Harriman controlled over 94% of outstanding Northern Pacific shares, leaving insufficient shares for short sellers to cover their p
• In October 2008, a short squeeze drove Volkswagen AG shares on the Xetra DAX from €210.85 to over €1,000 in less than two days, briefly making it the most valuable company in the world.
• In November 2015, Martin Shkreli's involvement with KaloBios caused its share price to rise by roughly 2,600% in just five trading days, though this was driven by hype and his reputation rather than a classic short squee
• The GameStop short squeeze reached an all-time intraday high of US$483 on January 28, 2021 on the New York Stock Exchange.
• In March 2022, a short squeeze on LME nickel contracts caused prices to rise by around 250 percent, after which the LME halted all trading and reversed many of the trades.