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

Short Squeeze

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.

How We Make Money

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.

For Business

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.

Get more from a personalized relationship with a dedicated banker to help you manage your everyday banking needs and a J.P. Morgan Private Client Advisor who will help develop a personalized investment strategy to meet your evolving needs. Contact your nearest branch and let us help you reach your goals. Funding for education can come from any combination of options and a J.P. Morgan Advisor can help you understand the benefits and disadvantages of each one.

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 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 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.

How long will a short squeeze last?

In general, short squeezes tend to last somewhere between several days and several months. There is no real “typical” length for a short squeeze, as each one is unique.

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.

Newsstand offers advanced investment strategies that combine human ingenuity with AI technology. Our investment strategies, which we call “Investment Kits,” help investors manage risk and maximize returns by utilizing AI to identify trends and predict changes in the market. Invest in up to 20 stocks and ETFs by adding a single Kit to your portfolio. Our AI will rebalance your investments on a weekly basis to optimize performance. All you have to do is build a portfolio of Kits and leave the rest of portfolio management to AI.

  • 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.
  • Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida.
  • For more information please refer to your account agreement and the Margin Risk Disclosure Statement.

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.

CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker. Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago. Whether you prefer to independently manage your retirement planning or work with an advisor to create a personalized strategy, we can help. Rollover your account from your previous employer and compare the benefits of Brokerage, Traditional IRA and Roth IRA accounts to decide which is right for you. A J.P. Morgan Private Client Advisor works with you to understand your goals, to create a customized strategy and help you plan for your family’s tomorrow, today.

Short Squeeze