Cracking the Short Squeeze

12 Okt 2023

Imagine this: a group of traders betting that a stock's price will drop. But suddenly, the price surges, forcing them to buy and causing a chain reaction of buying that shoots prices up. This exciting but risky event is called a short squeeze.


Why Does It Happen?

Short squeezes occur when a lot of traders need to buy suddenly. These traders, initially betting on price drops, now must buy to cover their positions, creating a buying frenzy. The more traders in this situation, the higher the prices shoot.


It's Not Just Stocks:
Short squeezes don't only happen with stocks; they can happen in any market where traders can bet on prices dropping. If there aren't many ways to bet against an asset, its price can keep rising for a long time.


Rare Opposite — Long Squeeze:
On the flip side, there's a rare event called a long squeeze, where people betting on price rises get trapped in a selling frenzy, causing prices to drop suddenly.



How Traders Use It:
Smart traders watch the long/short ratio for an asset. If there are more bets against it (shorts) than for it (longs), there might be a squeeze opportunity. These traders buy before the squeeze and sell when prices shoot up, making a quick profit.


In the world of finance, short squeezes are like exciting rollercoaster rides. They can lead to big gains, but if you're not careful, you might end up taking a financial plunge.

Happy trading 💜