Definition
A short squeeze occurs when a heavily shorted stock's price rises sharply, forcing short sellers to buy shares to cover their positions and limit losses. This buying pressure further increases the price, triggering more short covering in a feedback loop. Short squeezes can cause dramatic, rapid price spikes disconnected from fundamentals. Conditions for squeezes include high short interest, low float, positive catalyst, and limited available shares to borrow. The GameStop squeeze in 2021 demonstrated extreme squeeze potential.
Example
With 40% of shares sold short, unexpected positive earnings cause the stock to jump 20%. Short sellers facing margin calls must buy to cover, pushing prices up 100%+ in days. After the squeeze, prices often return toward fundamental value.
FAQ
What is Short Squeeze?
Rapid price increase forcing short sellers to buy shares to cover losses.
Why is Short Squeeze important?
Short Squeeze helps investors evaluate trading mechanics and make more informed decisions.