#754 - What Happens In A Short Squeeze?

The "Daily Call" From Option Alpha

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What happens in a short squeeze?” A short squeeze is actually a really popular thing with people to talk about. You often hear about a short squeeze happening or potentially happening after a stock has had a big run down and then potentially gets some news that could turn it the other way. All that really happens in a short squeeze is that there becomes a lack of supply of the stock available and then excess demand for the stock and this is where the shorting really comes into interest because when you short a stock, you have to have supply of that stock available to borrow from the brokerages or from the market itself. If somebody wants to short stock, they have to borrow it from somewhere. If there’s a lack of supply, now there’s this demand, what happens is that short sellers have to cover their positions on the stock. If they get good news or if the company has a good announcement or it’s just really, really oversold and due for a bounce, then somebody who’s a short seller, well, in order for them to cover their position, they got to buy back stock. And so, if there’s a short supply of stock out there and there’s a lot of demand for it, then that results in the price being driven up with all this additional volume.

You typically see this in really low float, low liquidity type stocks where it really, really is exaggerated, not necessarily in broad market indexes or ETFs because there’s probably enough available to borrow and there’s enough shares out there, but it’s a really interesting thing. Sometimes they happen pretty quick, pretty fast, they can move pretty dramatically, but you don’t really know when it’s going to happen or how much of an impact. Again, all that really happens in a short squeeze is we get this really big move up potentially also driven by the fact that short sellers have to cover their positions and buy back stock, but it’s not necessarily just them. It also is probably the market driving in demand from some outside reason. Again, a great earnings announcement, a great report, a great global economic number that came out that impacted the ETF or the sector or the industry. That could always drive demand as well and kind of exacerbate the issue. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.