Short Squeeze
A rapid price surge in a heavily shorted stock that forces short sellers to buy back shares to cover their positions, amplifying the price move.
What is Short Squeeze?
A short squeeze occurs when a stock with a high short interest — meaning many investors have bet against it by selling borrowed shares — experiences an unexpected price increase. As the price rises, short sellers face mounting losses and may be forced by margin requirements or risk controls to buy back shares to close their positions. This buying activity further pushes the price higher, triggering more short covering in a self-reinforcing cycle. Short squeezes can be detected in advance by monitoring short interest as a percentage of float and the days-to-cover ratio, which estimates how many days of average trading volume it would take all short sellers to cover. A days-to-cover ratio above 5 is often considered a warning sign for potential squeeze risk.
Example
In January 2021, retail investors coordinating on the Reddit forum WallStreetBets bought shares and call options in GameStop, a video game retailer with short interest exceeding 100% of its float. As the stock surged from under $20 to nearly $500 in days, short sellers — including major hedge funds — suffered billions in losses while being forced to buy back shares, further accelerating the price move in a textbook short squeeze.
Source: Investopedia — Short Squeeze