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The short interest ratio, also known as days to cover, is the stock’s total number of shares sold short divided by the stock’s average daily trading volume equal to the total number of days to cover or close the position. The short interest ratio shows the average number of days needed to exit a short position. While a low short interest ratio shows a lower average of days needed to cover a position, a high short interest ratio shows the opposite. A high short interest ratio can be an indicator of a short squeeze. The Volkswagen downfall sparked interest in short sellers to profit from the failing company, who, therefore, entered into a short position. However, on October 26, 2008, Porsche increased its stake by announcing a 74.1% ownership in shares of the Volkswagen company. As the financial crisis continued, the short interest in the Volkswagen company increased, which is the number of Volkswagen shares that had been sold short but not completed or closed out.

Securities and Exchange Commission , naked short selling is illegal. The naked shorting tactic is high risk but also poses a high reward. 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.

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The short sellers created a massive spike in demand for the stock, and over the span of a few days, the price of the stock soared more than 300%. In October 2008, as the Great Recession took a toll on economic markets, the prospects of the Porsche SE deal began to fade. Simultaneously, investors hoping to capitalize on an imminent price decline took a large number of short positions. Porsche SE then shocked the market by announcing the company had been quietly building its stake in Volkswagen via call options, and that only about 6% of the stock remained in the open market. While https://www.bigshotrading.info/s don’t happen very often, there have been many short squeezes throughout history. To illustrate this process, let’s say that you short a stock at $25, so it can’t go lower than $0 — meaning your maximum profit is $25. However, if the price of the shorted stock rises, you will lose money.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The short interest on GameStop was in excess of 130% and even peaked over 140% at one point, i.e. the short interest was greater than the actual shares outstanding, a rare sight to see.

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Watching short interest can tell you whether investor sentiment about a company is changing. For example, if a stock typically has a 15% to 30% short interest, a move above or below that range could signal that investors have shifted their view on the company. Fewer short shares could mean that the price has risen too high too quickly, or that the short sellers are leaving the stock because it has become too stable. A short squeeze accelerates a stock’s price rise as short sellers bail out to cut their losses. In order to trade short squeezes, you should do thorough research on the share market beforehand.

On the contrary, it has also sparked interest in short sellers, who are predicting that ABC’s stock value will eventually decrease, and it’s only on a temporary upward trend. To understand the Short Squeeze meaning further, it’s important to understand short and long positions, the roles of short sellers and buyers, and how these forces can create a bullish trend in the stock market. Heavily shorted stocks tend to be heavily shorted for a reason; make sure to seek investment advice and evaluate a given company, and understand why it’s being valued the way it is by the stock market as a whole. They offer a list of shorted stocks, narrowing down the short-selling information based on the number of short-sold shares. In addition to these official websites, the stock exchanges also publish short interest stock information.

How Does a Short Squeeze Work?

Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name. Most of this price movement came from the holding company Porsche SE, as well as the German government, who both owned a great deal of the shares, meaning very few shares were actually being traded publicly.

A short squeeze happens when market prices rise beyond the predictions of market analysts, ‘squeezing’ traders out of the market. In this instance, they attempt to exit their trades as quickly as possible by selling their short positions. If it is not possible, short sellers are then forced to rebuy borrowed shares at an increased price and return them in order in order to cover their positions.