Trader Tips
Mar. 28, 202317 min read

Short Squeeze: What Is It + Strategies for 2023

[object Object] image

Written by Tim Bohen

It’s time to get up close and personal with a little something called the short squeeze. 

No, I didn’t just get all weird on you. A short squeeze is a stock market phenomenon that happens all the time, where too many short sellers actually trigger a spike in a stock’s price. 

A short squeeze can be a trader’s biggest nightmareor a dream come true, depending on your position. 

Ready to learn more? In this post we’ll address everything you ever wanted to know about short squeezes, including what they are, how to identify them, and how to take advantage of them. 

What Is a Short Squeeze?

What Is a Short Squeeze?

© 2019 Shutterstock

You’ve heard the saying “what goes up must come down.” 

A short squeeze sort of follows this logic, but in reverse: what goes down hard enough will probably bounce.

A short squeeze refers to an event where a stock is so heavily shorted that it actually causes the price of the stock to go up. 

As the price rises, the short sellers feel the squeeze: they’re forced to buy to cover. As everyone’s scrambling to get out of their positions at once, it simultaneously creates more demand and makes the stock price go higher. 

The more the panic rises and the more short sellers jump ship to cut their losses, the bigger the squeeze. 

Lately, short squeezes have become an all-too-common occurrence. 

Why? It could be a variety of reasons. Maybe it’s that short selling has become more popular. Maybe it’s just the way stocks are playing out right now and it’s cyclical. 

Short selling is always risky, and this makes it even riskier. 

Does that mean you shouldn’t short sell? Not necessarily. But it does mean that you have to do extremely thorough research to make sure that you stay safe in trades! You won’t skate by for long purely based on luck. 

What Is the Opposite of a Short Squeeze?

What Is the Opposite of a Short Squeeze?

© 2019 Shutterstock

In reading the above, hopefully you got scared enough to never want to be in the clutches of a short squeeze, ever. 

However, you might be wondering … well, could I just go in the opposite direction, not short sell, and clean up with mega profits?  

Sorry … but it doesn’t quite work that way. Yes, it’s possible to profit if you’re on the long side of a short squeeze, and we’ll talk about that more in this post. 

However, simply going long all the time doesn’t guarantee that you’re safe from the squeeze, because long squeezes exist, too.

What Is a Long Squeeze? 

What Is a Long Squeeze?

© 2019 Shutterstock

A long squeeze is the opposite of a short squeeze.

In this scenario, you buy and take a long position rather than shorting. You’re expecting/hoping for the stock to rise in price. 

But in the case of a long squeeze, some sort of catalyst begins to move the stock price downward, causing the price of the stock to drop. 

This prompts buyers to exit their positions and sell. This has the effect of creating a bigger price decline, which then causes more people to sell. 

Yep: snowball effect. 

As you may have gathered, this puts short sellers in an advantageous position. 

Important: whether it’s a long squeeze or a short squeeze, these events are triggered by a lack of balance in supply and demand. 

You don’t want to get caught on either extreme, so it’s super important to make sure you do ample research and determine whether you’re entering the trade on the right side. 

You can never know entirely — there are too many factors at play. But research can help you rest assured that you’ve done all you can and help improve your odds!

Should You Try Short Squeeze Trading? 

Should You Try Short Squeeze Trading?

© 2019 Shutterstock

Here’s the thing about short squeezes…

If you’re caught in one, they’re the worst thing ever… 

But on the flip side, if you’re long during a short squeeze, you’re feeling fine about life…

That’s why short squeezes are worth knowing about: they can be worthwhile if you’re on the long side of things. 

Trading a Short Squeeze

Say that you’re looking at a low-priced penny stock and the company has some major flaws. Maybe their earnings reports are all over the place, maybe they don’t have good funding, maybe they’re poorly managed. Maybe all of the above.

While it would be unrealistic to think that a company like this will turn around and change the world, it’s possible that the stock could spike with news or a positive catalyst

It happens all the time: stocks will experience huge gains in short periods of time, only to fizzle out shortly after. 

So if everyone is going short on a stock, you could be positioned to take profits if there’s a squeeze. 

If the price starts to go sky-high, everyone will be exiting their positions and buying to cover while you’re sitting pretty and raking in profits. Well, that’s in an ideal world. That’s not necessarily always how it plays out. Which leads to the next point…

Risks of Trading Short Squeezes 

Risks of Trading Short Squeezes

© 2019 Shutterstock

There’s no such thing as a sure thing in trading! Read that last sentence again if you have to — because it will never stop being true.

It’s possible that you think you’ve found a contender for a short squeeze and go long, only to have the stock continue to drop. 

If there’s no spike, you could stand to be in a losing position. 

That’s the risk that you run when you try to trade short squeezes. And you’ll never be able to entirely circumvent that risk or get it right every time. 

However, there’s good news…

The good news is that if the stock doesn’t experience a spike, you can cut losses quickly and minimize your losses. That’s no small thing.

Compared to the pain of being stuck in a short squeeze, it usually isn’t quite as bad. However, there is a risk nonetheless, so remember it! 

Short Squeeze Real-Life Examples

Short Squeeze Real-Life Examples

© 2019 Shutterstock

All right, you’ve got an idea of what a short squeeze is, but let’s put it into practice.

To bring it all home, let’s talk about a notable — or rather, notorious — recent example of a short squeeze…

The Curious Case of SES

This was a classic Friday afternoon short squeeze. 

Yup: Friday short squeezes are a thing.

A ton of short squeezes happen on Fridays: if there’s news, no short seller wants to be left holding a position over a weekend, when interest could only build over the weekend and make the stock price explode on the market open on Monday. 

With SES, it all started with a loser stock taking a little run into the $3s. 

Short sellers took interest, because the company was fundamentally flawed. 

But they should’ve done better research, because, on Thursday, there’d been a press release saying that they’d purchased another company. 

As seasoned traders know, penny stocks can move BIG on news like this, even if it’s vague. And move this stock did … from the $3s to over $9 in less than an hour, making “FML” the new official mantra of all the short-sellers holding positions. 

… and “hallelujah” the cry of all the longs. 

What Was the Biggest Short Squeeze Ever?

What Was the Biggest Short Squeeze Ever?

© 2019 Shutterstock

While SES might have seemed like the end of the world as some traders knew it, it was seriously small potatoes compared to one of the biggest short squeezes of all time. 

Love a good story? Read on.

In 2008, the car company Volkswagen was part of a legendary short squeeze. 

At the time, the market was very bearish toward the company. Add to that the fact that VW was largely believed to be independently owned. This led to a ton of short sellers taking positions betting against the company…

… but there was something they didn’t know. In late October, another auto biggie — Porsche — made an announcement that it had acquired a significant (74% to be exact) ownership share in the company

Uh-oh.  

In short order, Porsche took over operations at Volkswagen, and both individual and institutional investors had a “Hunger Games”-like race to get out of their short positions. 

The price spike was massive — more than 90%, which is practically unheard of for a large company.

This spike was so huge that for a short period, it made Volkswagen the world’s largest company — at least in terms of market cap. 

Sure, it was short-lived but long enough to decimate many accounts.

Oh, to have held a long position during that time! 

Strategies to Profit From Short Squeezes

Yes: There ARE strategies to take advantage of short squeezes.

The basic idea is that you want to take a long position on a stock that will experience a short squeeze, so that when the short sellers are going crazy trying to close their positions, you can benefit from the ever-rising price. 

In the succeeding sections, we’ll go into some of the strategies and things to think about if you want to take advantage of short squeezes! 

How to Use the Short Squeeze to Your Advantage

How could you use a short squeeze to generate profits?

Here’s an example. Let’s revisit SES from above.  

Say that you’d been watching this stock and saw short sellers piling on top of each other. But you’d gone the extra mile and done some research, and you saw the press release.

In this case, you might have the wherewithal to know that it could be something that could move the stock price. So instead of going short, you’d go long, and potentially rake in some awesome profits. 

Only problem is, how could you have known that it would happen? That’s where the hard part comes in … and it takes a ton of research and diligence. 

When a drop in stock price is in the forecast and suddenly the price of a stock starts going up, that’s a big indication that short sellers will be exiting positions and buying to cover. 

Could someone benefit from everyone exiting positions? If noticed quickly enough, yes … and sure, that someone could be you.  

How to Find Short Squeeze Stocks

How to Find Short Squeeze Stocks

© 2019 Shutterstock

OK, so your interest is piqued and you want to take advantage of these short squeezes. Only problem is … how do you find them? 

Well, finding short squeeze stocks is one of the biggest challenges. Remember: if it was easy, everyone would do it all the time! 

However, there are some tricks and strategies that can help you find potential opportunities. 

Short Squeeze Data

Data and research are a trader’s best friend when it comes to identifying potential short squeezes. 

Looking at stock charts can help you identify short squeeze situations if you’re watching and double-checking price movements with company information. 

It’s a balance of fundamental and technical analysis — they both work together when trying to identify a short squeeze. 

StocksToTrade can help with some of the heavy lifting. It’s got plenty of tools to help you evaluate whether a short squeeze could be on the horizon, including Level 2 and more.

Signs of a Potential Short Squeeze

Looking for a short squeeze? Here are some other things to look for that could clue you in on opportunities. 

Keep in mind: these signs are just that … not guarantees. ALWAYS back up your findings with additional research. Build a strong case for your trade by looking at it from a number of different angles!

Look for a Tight Float 

Once again … I’m not getting weird with you. 

Float is the amount of a company’s stock that is available for trading on the market. To spot potential short squeezes, you’ve got to consider the float. 

If the float is very small, it could be for a good reason. For instance, it could be because some big shareholders have big stakes in the company. 

However, regardless of the reason, a tight float could make it hard for short sellers to find shares to cover when the stock price rises. So it’s worth taking into account.

So how can you measure the float? Compare the short interest (or the number of shares shorted) to the float. In general, a ratio of 10% or more is a red flag. 

Time-to-Cover Ratio

Go ahead, divide the total shares of short positions by the daily average volume. This can give you a good indication of how bullish or bearish traders are … and help you use it to your advantage.

Ideally, you want a stock that has a time-to-cover ratio that’s been in the double digits for a few days, because this is what short sellers look for. 

But if you’re looking to go long, this requires that you think a few steps ahead and consider whether there’s a catalyst that could make the stock perform differently than short sellers are expecting/hoping for.

Keep in mind: this isn’t a sure sign of a short squeeze. Rather, this ratio should be used as one tool to help you narrow down potential short squeezes for your watchlist. 

StocksToTrade

StocksToTrade can help act as a short-squeeze screener … it can help you do some of the research necessary when it comes to finding potential short squeezes. 

You can also use the social media scanners to see if a big percent gainer is getting a lot of online buzz about short selling … especially if they’re trying to tell you to short sell, too! This could be a sign that a short squeeze is on the horizon.

Here are some of the many tools and resources that STT has to offer: 

  • Education. StocksToTrade Pro is a growing community of traders that helps you learn the mechanics of the market. Along with a posse of like-minded, motivated traders, you’ll find your stride faster than if you tried to do it alone! Mentorship is vital … this is the perfect community to help you get familiar with the market. 
  • Scans a-plenty. Traders should be scanning the markets every day. But you don’t need to sacrifice all your free time doing it, especially if you want to have a life! STT has some incredible scanning software that makes it easy to create and maintain strong watchlists. 
  • Paper trading. Virtual trading lets you test strategies and get your feet wet. STT’s paper trading module lets you try things out before putting actual money on the line.
  • Technology! Be sure to check out StocksToTrade’s awesome service powered by Oracle! It’s an emotion-free approach to finding great potential trades. 

Give it a try today with our 14-day trial for just $7!

Conclusion 

Conclusion

© 2019 Shutterstock

The short squeeze is a force to be reckoned with. While you certainly don’t want to be on the wrong side of the equation, short squeezes can create great opportunities for savvy traders.

While you can never be certain of whether or not a stock will turn into a short squeeze, there are certain signs, indicators, and strategies that traders can employ to try to anticipate and take advantage of them. 

But know this: Taking advantage of a short squeeze requires diligence, patience, and plenty of research! 

Short squeezes — and trading low priced stocks in general, really — aren’t for the faint of heart. However, by educating yourself and being willing to put in the hard work needed, you can be well ahead of the game. 

Have you ever been on the winning or losing end of a short squeeze? Leave a comment and tell us about your experience!