Been a while since I posted and many have asked about what is a short squeeze so I decided to do a blog entry to make it easier to explain how these work.
What is a short squeeze?
A short squeeze occurs when a stock that is shorted has its price
start to rise quickly, this make shorts close their position or face larger
loses. This is because traders who short
also known as shorters only profit if the stock price drops.
Now a shorter's losses are the short squeezer's gains,
because the short squeezer is able to force the price to rise, buying into the
stock and selling as it peaks higher and higher which drives the cover price
up. Straightforward and simple but why doesn't it always work?
A short squeeze is not without risk it requires all buyers
to sell on the ask or higher this will drive the price up as shorts clamber to
cover.
Why this fails is because shorts will try to dive the bid
with sells to try to scare longs into selling. If longs bail early by dumping
the bid it craters the stock and shorts get out of a trap. Shorts can only
borrow so many shares of a company that is the short interest percent once
there are no more borrows they can no longer sell the bid. These crowded shorts
happen often in low float stocks with an already higher than normal short
float.
Supply and demand shortage is what fuels this.
What to look for as a short squeeze candidate?
Short interest sometimes the higher the better. It is the
number of available shares that have been borrowed and sold short. I look for
over 10%
Days to cover this is a key factor because if the volume is
low this will raise the price parabolic so the higher the number of days the
better.
Stocks that have a known history of spikes these are usually
stocks shorts have been squeezed on before.
Recent news or a promotion. News could be anything from a
company press release, a SEC filing within the last week to 2 max or even
another company in the sector. A current promotion of the company whether paid
or uncompensated. While news has a stronger weight a promotion can also move
the stock parabolic.
Price point of the short. This was exemplified when an
entire chat went short Resolute Energy Corporation ($REN) at $16. That was the
intraday support thus many closed their short and flipped long to create a squeeze
on that group which topped out at $23 over several days and now the stock is
over $32 time of posting 100% price increase.
That was a successful squeeze.
