What is a Short Squeeze?

A short squeeze is forced buying from short sellers who are already in the marketplace. A short seller is someone who is trying to profit from a stock going down.

When buying a stock, the worst thing that can ever happen is that you lose 100%… but in short selling, you have unlimited risk.

Stock can go up hundreds or thousands of percentage points – especially if the stock is getting squeezed by forced buying from short sellers.

The GameStop Squeeze

Short squeezes became in fashion earlier this year in January, with the WallStreetBets Community focusing first on GameStop.

GameStop had a short float, a short interest of 140% of the outstanding shares.

Due to naked short selling, hedge funds were shorting the stock on the stock without even borrowing it.

When the WallStreetBets community recognized that, they all started buying. Their buying caused the stock to go up, resulting in some of the shorts starting to get squeezed.

When that happens, you get a virtuous cycle of buying.

That’s how we were able to see GameStop go from the price of about $20 to $500 in a matter of days.

Other Notable Short Squeezes

We also saw short squeezes come into a lot of other stocks – $AMC $SNDL $BBBY $BB.

There’s been a constant rotation of these mini short squeezes we’ve been seeing. GameStop itself has had three major squeezes, AMC had two major squeezes.

My team and I now are paying attention to stocks that have high short floats.

Anything with a short float above 20% is in squeeze territory.

Some of those layers of probability also apply. If we’re seeing the heavy volume along with momentum coming in, that could be the beginning of a squeeze.

Risks in Short Squeezes

Being too late

A lot of these companies are not necessarily the best companies out there, fundamentally speaking, and it’s probably why they had really large short interests.

Once the forced buying is done, there’s a real risk that the stock can go right back down to its more fair, fundamental value.

We want to make sure to get in on the ground floor of that squeeze – getting involved early – before it’s gone up a couple hundred percentage points, and when the technical setup was still there.

If not, you risk buying in too late at too high a price and losing the very next day.

Secondaries (Capital Raises)

An IPO, initial public offering, is when a company’s shares first become available to the public.

They can always add on more shares to that IPO by doing a secondary.

A secondary offering is when a company decides to utilize their stock price to raise additional funds for the company’s operation by offering out additional stock.

Now, let’s think about what secondary offerings mean from the perspective of supply and demand.

Demand is coming into the stock, and some of that demand might be from the short squeeze. You also have a limited number of stock supply, which is what we call the stock’s float.

Now, when you do a secondary offering, the overall stock float will increase.

If you’ve got the same amount of demand, and all of a sudden, you’ve got much larger supply because the float is increased, that stock will most likely go down.

AMC’s Secondary Offering

That is exactly what happened to AMC.

Many people don’t realize that a secondary offering actually caused the top of AMC.

AMC had that crazy short squeeze on June 2. It was actually the second short squeeze in the name.

In one day, it went from about $35 to $70+.

Then they announced a secondary offering the next morning, and the stock went all the way back down to $38.

Something to keep in mind regarding a lot of these companies…why were they so heavily shorted to begin with?

They’re usually strapped for cash, don’t have strong balance sheets, and possibly even lose money year over year.

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– Derrick Oldensmith

Senior Trader and Managing Supervisor