3 Strong Buy Stocks With Short Squeeze Potential

Short sellers zero in on a stock that they think is overvalued by the market. For example, Tesla Inc. (TSLA) captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles. In early 2020, Tesla was the most-shorted stock on the U.S. exchanges, with more than 18% of its outstanding stock in short positions. Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher. The continued rapid rise in price also attracts buyers to the security.

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Short Squeeze: Meaning, Overview and FAQs

Citron Research and Melvin Capital have reportedly suffered huge losses. There are specific actions you can take to try to protect yourself against a https://www.bigshotrading.info/blog/short-squeeze/ or to at least alleviate its grip. Our experts choose the best products and services to help make smart decisions with your money (here’s how). In some cases, we receive a commission from our partners; however, our opinions are our own. While high-profile squeezes get a lot of press when they occur, many stocks experience short-lived squeezes throughout a typical year as longs and shorts battle back and forth.

GameStop is one of the most high-profile short squeezes of the recent past. The trading action gripped investors (and arguably still does) as the stock remains at an elevated price long after the immediate short squeeze. Naked short selling is short selling a stock without first borrowing the asset from someone else. It’s the practice of selling short shares that have not been affirmatively determined to exist.

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When a short seller decides to sell the security, it’s called short selling. Short selling is when a short seller predicts that the value of a stock will decrease. To profit, the short seller will borrow the stock from their brokerage to sell and then purchase the stock back later at a lower price. If all goes as planned, the difference between what the short seller sold the stock for and the amount that they bought it back for becomes their profit. If the short seller’s prediction is wrong, and the stock’s value increases, it forces them to buy the stock back at a higher price from which it was sold, and pay for the difference.

That is, naked shorting can force a price drop, which leads to some share sales to cut losses, allowing the market to effectively find balance. The flight of short sellers and their impact on a stock’s price are known as a short squeeze. Short sellers are being squeezed out of their positions, usually at a loss. The other useful metric here is the „short ratio,” or „days to cover,” which is the number of days of normal trading it would take to generate enough trading volume to buy back all the shares sold short. There is no hard and fast rule here, and opinions vary widely, but a decent rule of thumb is 10 days. Ten days or longer to cover might indicate a crowded trade, and one you might want to avoid lest you get squeezed.

Spotting short squeeze stocks

While a majority of Markets Insider analysts had a Sell rating on the stock, it held up well on July 19, 2021, during a selloff sparked by an increasing number of cases of the delta COVID variant. A short squeeze also figures prominently in the plot of the classic film “Trading Places.” In the film the main characters “put the squeeze” on orange juice commodity futures. The stock of theater chain AMC has also been the subject of a short squeeze, though not as prominently as GameStop. Some have suggested that Tesla has been subject to a years-long short squeeze, given its high short interest and massive overvaluation, relative to competition. The stock’s momentum built on itself, and by the end of the month the stock had soared to more than $120 intraday – up some 60 times in price from just months before. Our goal is to give you the best advice to help you make smart personal finance decisions.

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. In October 2008, amid the broader financial crisis that caused most every stock to trade down, Volkswagen’s stock continued to trade higher.