When Does a Short Squeeze Happen?

Short squeezes occur when an instrument is consistently increasing in price over a set period of time, leading to those shorting it closing their positions either forcefully or voluntarily. So, if a stock like TSLA (Tesla) has been rising at 10% per week, the shorters of the stock might get forcefully liquidated by their brokerages via a margin call—or they might willingly close their positions to stop losing money.

As you can probably imagine, removing the downward pressure of the short positions on stock makes it drastically increase in price, making the stock "squeeze." Once this squeeze happens, the stock will start soaring in price, causing the ones who opened long positions to earn potential profits.

Namely, short squeezes usually happen when there's a high short interest on a particular stock. Short interest refers to the percentage of stock shares that are sold short—i.e. the percentage of positions that predict the price will go down. However, no stock can be shorted indefinitely, and once these shorts are closed, the stock starts rising.

Sometimes, short squeezes also happen due to a specific event. If, for example, a company publishes great earning reports over the most recent cycle, it will automatically gauge the interest of investors, potentially triggering a short squeeze.

» Read about the main differences between CFDs and options

Final Words

Short squeezes can be interesting for traders, but they are quite difficult to catch. So, a trader that plans to earn from a short squeeze should regularly follow market trends and be up to date with the latest events. Keeping an eye on technical details like the short interest and volume can also help a lot.

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