What is Short Squeeze?
A short squeeze occurs when a heavily shorted stock suddenly rises in price, forcing short sellers to buy shares to cover their positions, which further drives up the price in a feedback loop.
Short Squeeze Explained
Short squeezes can produce explosive, violent price moves as short sellers are forced to buy at any price to limit their losses. The GameStop (GME) event of 2021 is the most famous example. Stocks with high short interest (percentage of float sold short) are most susceptible. While potentially very profitable for longs, short squeezes are extremely risky to trade due to their unpredictability.
Real-World Example
GME had over 100% of its float sold short in early 2021. When retail traders coordinated buying, the stock surged from $20 to $480 in weeks. Short sellers lost billions as they were forced to cover at ever-higher prices, which pushed the price even higher.
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