Short squeeze stocks are typically businesses with poor financial performance targeted by institutional short sellers. When a stock has a high level of short interest, it becomes a target for investors to buy, thus causing a short squeeze that propels the stock price upwards.
Find out everything you need to know about short squeezes, real-world examples, how they work, and how to find the next big squeeze.
What Is A Short Squeeze In stocks?
A short squeeze happens when short sellers are forced to buy shares to cover their positions, pushing the stock price even higher. This could happen after a period of high short interest when there are more shares being sold short than available to trade.
How does a short squeeze work?
When many people sell a stock they do not own (short sell), the stock price can go down. But if the stock price goes up, these people have to buy the stock to give it back to the person who owns it. This can push the stock price even higher. This is called a short squeeze.
When more people sell a stock than buy it, the stock price goes down. This is called ‘selling short.’
When the stock price starts to go back up, some people might have to buy the stock to cover their position. This can push the price up even more, and this is called a ‘short squeeze.’ Short squeezes can also occur in options trading; this is called a Gamma squeeze.
What is a Gamma Squeeze
A gamma squeeze refers to a situation where options traders are forced to buy or sell underlying securities to hedge their positions. This is known as a gamma squeeze. Squeezes typically happen when there is a sudden change in the underlying stock price or volatility.
Gamma measures the rate of change in an option’s delta in response to moves in the underlying stock. Delta measures how much the price of an option contract will move in relation to changes in the underlying stock. If an option has a delta of 0.50, it will move $0.50 for every dollar the underlying stock moves. If the underlying stock increases by $1, the option will increase by $0.50. The gamma of an option tells us how much the delta will change in response to a $1 move in the underlying stock price.
For example, let’s say you own a call option with a strike price of $100 and a delta of 0.50. The underlying stock is currently trading at $105. If the stock goes up by $1 (to $106), your option will go up by $0.50 (to $0.51). That’s because the delta of your option increased from 0.50 to 0.51 (a 1% increase).
Let’s say the stock price decreases by $1 (to $104). Your option will decrease by $0.50 (to $0.49). That’s because the delta of your option decreased from 0.50 to 0.49 (a 1% decrease).
What is a big squeeze in stocks?
A “big squeeze” is a more intense version of a short squeeze, where even more short sellers are forced to buy shares to cover their positions. This can push the stock price even higher, resulting in a greater percentage increase than a normal short squeeze.
A stock squeeze is caused by high demand for shares combined with low supply. When there are more buyers than sellers, the prices go up. And when there are more sellers than buyers, prices go down. So, if there’s lots of demand for shares but not enough available for everyone who wants them, that drives prices up.
Are short squeezes legal?
Yes, short squeezes are legal. They are, in fact, a common occurrence on Wall Street and are used by investors to profit from price movements.
Short Squeezes & Reddit WallStreetBets
Since the start of the Covid pandemic, the short squeeze has been brought to mass popular attention through the Reddit forum WallStreetBets. With hundreds of thousands of members, this forum managed to work as a single team to push multiple short squeezes that bought many hedge funds and institutions to their knees.
I have to admire the work these independent retail investors did to play Wall Street at their own game.
If you are willing to filter through the millions of messages, you can find some real gold in this forum. Find them at WallStreetBets.
Short squeeze stocks examples.
AMC, GME, OverStock, and VW are all stocks that have been subjected to high-profile short squeezes in the past. We take a close look into what happened and share charts of their explosive growth.
GameStop stock squeeze
The most famous example of a short squeeze occurred in February 2021 when GameStop shares spiked over 1900% from $4.75 to$86. The rally was fueled by Reddit users trying to force the hedge funds to cover their positions by buying back the stock at a higher price. This caused the share price to increase dramatically, resulting in a short squeeze.
The GME stock price remains 400% higher than in 2020.
Hedge funds and institutional investors claimed that Reddit users on the WallstBets forum were manipulating the markets, and this ended in a hearing by the house committee on financial services.
AMC stock squeeze
AMC Entertainment Holding Inc. experienced an incredible short squeeze in May 2021, again fueled by the Wallstbets Reddit forum. This big squeeze caused the stock price to increase by 520% in 6 weeks from $5.50 to $38.
Bed Bath & Beyond (BBBY) Short Squeeze
Another notch on the belt of the Reddit folks was BBBY, which in January 2021 catapulted 120% in three weeks. BBBY is being constantly played for the short squeeze, with a move of 70% in November 2021 and a move of 400% in August 2022.
But beware, many Redditors have lost a lot of money on these short squeezes because they did not time their trades properly or get out quickly enough. WallStreetbets is no guarantee of success.
VW short squeeze
VW was the victim of a serious short squeeze that peaked in 2008, sending the stock from $210 to $1,000. Due to the business environment and the collapse of VW’s share price after the global financial crisis, VW was heavily sold short. Believe it or not, not all short squeezes are created by the folks at WallStreetBets. The share price rocketed when Porsche announced it would take a controlling stake in VW. Hedge funds had to panic cover their short positions and buy back shares they had sold short. Further details are here.
OverStock short squeeze
Overstock is a stock known to experience short squeezes in the past. Starting in May 2020, the stock had a high short interest. By August 2020, the stock price had grown from $22 to $120, over a 350% increase.
How to find short squeeze stocks
The best way to find future short squeeze eligible stocks is to use a stock screener to scan for high levels of short interest. Short interest is the number of shares that have been sold short by investors.
This information is important because it can indicate how bullish or bearish investors are on a particular stock. For example, if there are a lot of short sellers, this could indicate that they believe the stock price will fall in the future. Conversely, if there are very few short sellers, this could indicate that they believe the stock price will rise.
Look for stocks with a very high short interest.
High short interest is a stock with many shares sold short by investors. This information is important because it can indicate how bearish or bullish investors are on a particular stock. For example, if the short interest is high, this could indicate that many investors believe that the stock price will fall in the future.
What is considered a high short interest?
Most investors consider a high short interest to be great than 5.%, but our data suggest that the 90th percentile of US stocks has a short interest of >5.7%. This means that the highest shorted 10% of US stocks have a short interest of 5.7% or more.
Use Finviz to find future short squeeze stocks.
Jump to Finviz – Type in the stock ticker – review short interest
Use Stock Rover to find short squeeze stocks
Stock Rover allows scanning the entire US stock market for short selling and short interest information. The image below shows the depth of short trading screening possible, 4,500 stocks to be exact.
Register for free with Stock Rover and import this screener code to get a complete list of stocks in the USA with a short interest ratio and short interest percent.
Stock Rover Screen 1.0
Short
{“description”:””}
{“name”:”Short”,”filterData”:[{“data”:[],”field”:”short_pct”,”excluded”:false},{“data”:{},”field”:”short_interest_ratio”,”excluded”:false},{“data”:{“type”:”list”,”value”:[“NA”,”NY”]},”field”:”exchange”,”excluded”:false},{“data”:[],”field”:”cap”,”excluded”:false}],”description”:””,”equityType”:”Stock”,”limit”:0,”universe”:3}
*===================================================*
Short
Criteria:
Short Interest Ratio
Exchange: NASDAQ, NYSE
Visit Barron’s to see short interest data
Barron’s provides a simple way to see the short interest for a stock. Here is a link to Barron’s page for Tesla, where you can see the company’s short interest information.
Use WallStreetBets to find short squeezes.
You can sift through the WallStreetBets forum on Reddit to try to find out what they are planning next. But be prepared it could take many hours. One way to save time on this forum is to use this link which filters WallStreetBets on mentions of a squeeze.
Other ways to find potential short squeezes
There are a few different ways to find a stock’s short interest. One way is to look at the major exchanges that it trades on. The New York Stock Exchange (NYSE) and Nasdaq have websites where you can view this information. Another way to find this information is through online brokers such as TD Ameritrade, E*TRADE, and Charles Schwab. Finally, you can find this information from financial news websites such as Yahoo! Finance and CNBC.
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Conclusion
Short squeezes can be beneficial for investors long on a stock because they can help push the price even higher. However, keeping an eye on short interest levels is important because they can be a sign that a stock is overvalued and due for a correction.
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