“The pain among investors was unparalleled versus any other market scenario I have encountered.” TeslaĪnother good example of a short-squeeze is Tesla (NASDAQ: TSLA), which has squeezed traders by a year-long bull run that has lifted the stock from $224 last year to above $1,800 as demand for its electric vehicles continues to improve. “It was one of the most painful days in my career,” Arndt Ellinghorst, then at Credit Suisse, but now a Senior Managing Director at Evercore ISI says, according to the Financial Times. The sudden news, combined with a large number of short positions and a very small float, caused the stock to skyrocket within a short period as investors desperately tried to cover their positions. Investors and hedge funds that had shorted the stock were caught off guard and suffered massive losses, and some ended up taking legal action against Porsche SE. This short squeeze briefly made the Wolfsburg-based automaker to become the most valuable company in the world, worth more by market capitalization than Exxon Mobil. When Porsche disclosed it had amassed control of roughly 75% of the shares in Volkswagen, short covering reached proper squeeze level, pushing Volkswagen shares from a low just above €200 on Oct. Several months later the company disclosed it owned 42.6% of Volkswagen freely traded shares as well as controlling another 31.5% through financial instruments. In March 2008, Porsche SE denied claims that it planned to take over Volkswagen. However, these investors were not aware that Porsche SE had been quietly buying almost all freely traded ordinary Volkswagen shares in an attempt to take over the company. German automaker Volkswagen was almost heading for bankruptcy but ended up becoming the world’s most valuable company for one, brief day.īack then, investors and hedge including Elliott Management Corp and D.E. Here is an example of a short squeeze: In midst of the 2008 financial crisis something unexpected happened. Shares were trading below $5 per share but over the span of just 4 day, shares breached $100 per share! Volkswagen This stock was heavily shorted but with the surprise win, shares were back in favor and buyers drove the stock up causing shorts to cover and the stock to shoot up. DryshipsĪ good example of this was Dryships ($DRYS) that ran up over 2,000% following the news that Trump won the election. What also happens is new buyers are alerted when prices start to move which even further magnifies the buying and could cause a stock to go parabolic. “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. At such points most traders have already sold shares. Short squeezes often happen at the end of deep slumps, like the one we saw in March as coronavirus fears took hold. 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. However, when a squeeze is underway the volume is usually increased by a lot so shorts could cover more quickly. 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. The short interest ratio (SIR) measures the amount of shares short divided by the average daily trading volume. They list the short interest and the percentage short of the float along with the short interest ratio. You can find short information on stocks through most financial sites like Yahoo and Google Finance. 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, causing the stock to go up very quickly and by a lot. 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.
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