What is a Short Squeeze?

Short squeeze is a term used to describe a phenomenon in financial markets where a sharp rise in the price of an asset forces traders who previously sold short to close out their positions. The strong buying pressure “squeezes” the short sellers out of the market.

A short squeeze often feeds on itself, sending the asset’s trading price even higher and forcing more short sellers to cover their positions.

As traders who previously sold short the asset must buy to cover their positions, the closing out of their short trades simply adds more buying pressure to the market, thus further fueling a rise in the asset’s price.

Short squeezes are typically triggered either by unexpected good news that drives a security’s price sharply higher or simply by a gradual build-up of buying pressure that begins to outweigh the selling pressure in the market.

As short sellers begin to exit their positions, it adds more buying pressure in the market, which can cause the price to rise even higher, forcing more short sellers to cover their positions.

How to Spot an Impending Squeeze

Technical traders monitor certain indicators that may reveal that a stock is ripe for a short squeeze to occur if substantial buying pressure begins to enter the market.

One is the short interest – the percentage of a stock’s total number of shares that are currently held by short sellers. When the percentage of the stock’s total shares that are currently sold short is significantly higher than the normal level, the likelihood of short squeeze is considered to be increased.