Short Squeezes: A Four-Factor Model CFA Institute Enterprising Investor

Former high-flying names such as those in the ARK Innovation ETF (ARKK) got hammered as sellers came after high-valuation growth stocks. As the market finds a bottom, beaten-down stocks stretch to the downside, and late short sellers pile in, Short Squeeze opportunities develop. On Wall Street, short selling (borrowing shares to bet against a company) is one of the most challenging endeavors to master. First, from a long-term perspective, anyone shorting is hypothetically swimming upstream.

The short interest had grown so dramatically that it amounted to more than 100% of the shares outstanding. Short interest is the total number of shares sold short as a percentage of the total shares outstanding. The short interest ratio is the total number of shares sold short divided by the stock’s average daily trading volume. Speculative stocks tend to have higher short interest than more stable companies.

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In October 2008, amid the broader financial crisis that caused most every stock to trade down, Volkswagen’s stock continued to trade higher. Those who didn’t think a deal with Porsche would happen, or were buying Volkswagen stock to hedge another investment, shorted the automaker’s stock, assuming that its price would fall eventually. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone.

The trick is to identify the conditions that could lead to a squeeze ahead of time, and then determine how you might want to play it (or not). When a stock suddenly experiences a dramatic climb, with or without good news, it’s important to ask yourself, “Who would buy shares up here?” The answer? Someone who doesn’t have enough money to hold on any longer, or someone whose pain threshold has finally been crossed.

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So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze. They had borrowed to support their pessimistic investment, and they now had to pay it back — by buying GameStop shares at higher prices. This was bad news for short-sellers, who had bet the stock would keep falling. Unlike most investors, who want their stocks to appreciate, short-sellers make money when stock prices go down and lose money when they go up.

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Carvana Stock Is Falling. J.P. Morgan Turns Bearish.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. When a company’s board decides to reduce the outstanding share count, this is what you get. This highly variable metric is the value of all the company’s shares. All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Download Q.ai today for access to AI-powered investment strategies.

• Carvana stock was falling Thursday after a streak of gains in the last couple of months that appeared to have squeezed short sellers.
• This will lead to more short sellers rushing to buy ABC stock back to exit their position and minimize further loss.
• If the stock price rises instead, a short-seller may lose money — they still have to return the shares to the broker, which may require buying them back at the new higher price.
• Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice.
• Short sellers zero in on a stock that they think is overvalued by the market.

In fact, 5 million Medicom shares have been sold short of its 25 million shares outstanding. This means that the short interest in Medicom is 20%, and with daily trading volume averaging one million shares, the short interest ratio is five. The short interest ratio, also called days to cover, means that it will take five days for short sellers to buy back all Medicom shares that have been sold short. When a heavily shorted stock unexpectedly rises in price, the short sellers may have to act fast to limit their losses.

Bullish call buying instead of buying the stock is attractive here because of the leverage it provides and the fact that risk is limited. This is really the first time https://www.bigshotrading.info/stock-market-basics/ we have seen such trading instigated by a band of retail traders. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Corporate fraud has frequently been uncovered in public reports published by short-sellers. Add short squeeze to one of your lists below, or create a new one.

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• Technical traders view the situation as indicating that the market may be due for an upside reversal in price movement.
• To gain a better understanding of how a short squeeze works, let’s break down the process into two phases.
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Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit. Please review its terms, privacy and security policies to see how they apply to you. Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. In fact, short-sellers can protect other investors from suffering capital losses by pointing out issues within companies that retail investors could have neglected – contrary to what many assume.

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