![]() Short squeeze exampleĪ notable short squeeze happened in October 2008, when the Volkswagen (VOWG) share price quintupled from €210 to over €1000 in two days. Often, higher than expected company earnings, technological breakthroughs or new sector-shifting products will cause prices to rise unexpectedly. Short squeezes will usually catch the markets off guard, and oversold indicators and a high or low short interest do not guarantee that a short squeeze will happen. To see the short interest, divide the number of shares that have been sold short by the total number of shares outstanding, then multiply the outcome by 100. This can help you to confirm the indicators’ findings, with a lower short interest denoting that fewer traders are currently shorting the company’s stock – meaning that they could be expecting the share price to rise. You can pair these indicators with the stock’s short interest – the total number of shares that have been sold short, but which have not yet been covered or closed, expressed as a percentage. Oversold areas are shown by the rectangular highlights. In the below screengrab – taken from our trading platform – the RSI is the top indicator and the Williams %R is the bottom indicator. Popular indicators that are used to identify oversold areas include the relative strength index (RSI) and the Williams %R. If a stock or other asset is oversold, then people might expect its price to increase. To identify a short squeeze, many traders will use chart indicators to find oversold stocks. The expiration date in a short cover is the date on which the borrower agrees to return the stock to the lender. If investors are using a short covering strategy with borrowed stock, they will need to buy back the shares which they have borrowed to open the short position before the expiration date arrives. This shift in the supply-demand dynamic causes prices to rise further, which compounds the effect of the short squeeze. This causes demand for the stocks to rise, which reduces supply. Short sellers will seek to abandon their short positions as prices rise. What causes a short squeeze?Ī short squeeze is caused by a rapid and unexpected surge in the price of an asset – usually a stock. ![]() This is especially true during a short squeeze or similar scenario where markets behave in an unexpected way. This is because derivatives are traded with leverage which can increase both your profits and losses. They can also be damaging for traders who are shorting a stock with financial derivatives like CFDs. Short squeezes can hit investors who are shorting the market with borrowed stocks particularly hard, because they could end up spending more money to rebuy and return the borrowed stock – known as short covering – than they anticipated. What is a short squeeze?Ī short squeeze is when market prices rise rapidly beyond what analysts and market participants had expected. Again, they will attempt to exit their positions quickly to prevent heavy losses. They will attempt to exit their short positions as quickly as possible to cut their losses.Ī long squeeze is when buyers – people who are long on a stock – are ‘squeezed’ out of the market in light of suddenly decreasing prices. A short squeeze affects short sellers, who are effectively ‘squeezed’ out of the market in light of rapidly increasing prices. A market squeeze can refer to either a ‘short squeeze’ or a ‘ long squeeze’.
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