Equity research: Short squeezes

Jan. 26, 2021

Here is the link.

Short squeeze - first time I read the concept.  

A short squeeze occurs because short sellers get skittish when it looks like their short bets may prove wrong. Short sellers face unlimited risk if they turn out to be wrong and a stock’s price rises. Not only that, but short sellers will also start getting margin calls from their brokers as their short goes bad.

The easiest way for short sellers to cut their losses and answer their margin call is to simply close their trade. In a short, that means buying back the stock to cover the shares they borrowed and sold.

But, sometimes there simply aren’t enough shares to go around for all the short sellers who want to buy back the stock. That drives up demand, which in turn creates a lot of buying pressure and a sudden jump in the price of a stock. This creates something of a snowball effect – short sellers buy up the stock and drive up its price, thus forcing other short sellers to do the same thing to limit their own losses. A short squeeze can turn what might have started as a gain of several percent into a gain of 10% or more in a single day.

When trading a short squeeze, the goal is to get at the start of the bullish activity, before the majority of short sellers have been able to cover their positions and demand for the stock fades. To get the timing right, you need to know that a short squeeze might be coming.

Scanning for a Short Squeeze

It’s easy to turn those guidelines into scanner parameters using Scanz. Essentially, there are three conditions that must be fulfilled:

1. The number of shares short should be greater than five times the average daily volume
2. The shares short as a percentage of the float should be greater than 10%
3. The number of shares short should be increasing

Follow up 

Oct. 27, 2021

Work on style of content using Microsoft word by changing line space, make content easy to read. 

A short squeeze occurs because short sellers get skittish when it looks like their short bets may prove wrong. Short sellers face unlimited risk if they turn out to be wrong and a stock’s price rises. Not only that, but short sellers will also start getting margin calls from their brokers as their short goes bad. 

The easiest way for short sellers to cut their losses and answer their margin call is to simply close their trade. In a short, that means buying back the stock to cover the shares they borrowed and sold. 

But, sometimes there simply aren’t enough shares to go around for all the short sellers who want to buy back the stock. That drives up demand, which in turn creates a lot of buying pressure and a sudden jump in the price of a stock. This creates something of a snowball effect – short sellers buy up the stock and drive up its price, thus forcing other short sellers to do the same thing to limit their own losses. A short squeeze can turn what might have started as a gain of several percent into a gain of 10% or more in a single day. 

When trading a short squeeze, the goal is to get at the start of the bullish activity, before the majority of short sellers have been able to cover their positions and demand for the stock fades. To get the timing right, you need to know that a short squeeze might be coming. 

Scanning for a Short Squeeze 

It’s easy to turn those guidelines into scanner parameters using Scanz. Essentially, there are three conditions that must be fulfilled: 

1. The number of shares short should be greater than five times the average daily volume
2. The shares short as a percentage of the float should be greater than 10%
3. The number of shares short should be increasing