The Name Describes Itself – Shorts are Being Squeezed Out of Their Positions:
When traders short stocks, they are essentially betting on a downward movement in price. When a large number of shorts get pressured out of their positions, a short squeeze ensues when they cover (buy back shares), resulting in a sharp and forceful move to the upside. Many times, a positive development improves sentiment in a particular stock, and if it is heavily shorted, can explode violently higher as shorts are forced out of their positions in order to avoid further risk.
If you’re struggling with the concept of shorting, it involves borrowing shares at an overextended price in an attempt to unleash them at a lower price for a gain. When shorts cover their positions, it creates buying pressure for that particular stock. And when shorts have good reason for exiting, and are all exiting at a similar time, the impending upward move can be explosive. As opposed to your typical trades to the long side where the risk is limited to the amount of shares you purchased, short positions carry virtually unlimited risk. By going long, the worst case scenario is that the company goes bankrupt. When shorting a stock, the price can theoretically go as high as it wants. In the end, the fear of losses stacking up paired with high short interest oftentimes results in a massive short squeeze.
Related Post: What Does “Shorting” a Stock Mean?
