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A forced buy-back cascade when shorts are liquidated into a rising tape.
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Leggi l’originale inglese →In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when demand has increased relative to supply because short sellers have to buy stock to cover their short positions.
Short selling is a finance practice in which an investor, known as the short-seller, borrows shares of stock and immediately sells them, hoping to buy them back later ("covering") at a lower price. As the shares were borrowed, the short-seller must eventually return that number of shares to the lender (plus interest and dividends, if any), and therefore makes a profit if they spend less buying back the shares than they received at the earlier date when selling them.
However, an unexpected piece of favorable news can cause a jump in the stock's share price, resulting in a loss rather than a profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the share price rise further.
Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. Purchasing the stock to cover their short positions raises the price of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock; i.e., there is increasing demand. This dynamic can result in a cascade of stock purchases and an even bigger jump of the share price. Borrow, buy and sell timing can lead to more than 100% of a company's shares sold short.
This does not necessarily imply naked short selling, since shorted shares are put back onto the market, potentially allowing the same share to be borrowed multiple times.
Short squeezes tend to happen with stocks that have expensive borrow rates. Expensive borrow rates can increase the pressure on short sellers to cover their positions, further adding to the reflexive nature of this phenomenon.
Short squeezes are more likely to occur with listed stocks with relatively few traded shares and commensurately small market capitalization and float. Squeezes can, however, involve large stocks and billions of dollars. Short squeezes may also be more likely to occur when a large percentage of a stock's float is short, and when large portions of the stock are held by people who are not tempted to sell.
Short squeezes can also be facilitated by the availability of inexpensive call options on the underlying security because they add considerable leverage. Typically, out of the money options with a short time to expiration are used to maximize the leverage and the impact of the squeezer's actions on short sellers. Call options on securities that have low implied volatility are also less expensive and more impactful. (A successful short squeeze will dramatically increase implied volatility.)
The opposite of a short squeeze is the less common long squeeze. A squeeze can also occur with futures contracts, especially in agricultural commodities, for which supply is inherently limited.
The sale of naked call options creates a short position for the seller, in which the seller's loss increases with the price of the underlying asset and is therefore potentially unlimited. Sellers have the option of hedging their position by, among other things, buying the underlying asset at a known price at any time before the option is exercised, converting their naked calls into covered calls.
By buying calls, per unit of capital invested, the buyer can create a larger upward pressure on the price of the underlying than they could by buying shares: this pressure is in fact realized when the seller purchases the underlying, and is greater if the seller invests more capital hedging their position by buying the (expensive) underlying than the buyer invests to purchase the (inexpensive) calls.
The resulting upward pressure on the price of the underlying can develop into a positive feedback loop, as call-sellers react to the rising price by buying the underlying to avoid exposure to the risk that its price may rise further.
Selezionato e riformattato da Short squeeze, dai suoi collaboratori, con licenza CC BY-SA 4.0. Revisione 1357060631. Sezioni e formattazione sono state abbreviate; la revisione collegata offre contesto completo e cronologia dei contributi. Questo testo mantiene la stessa licenza. I link aggiuntivi alle citazioni sono importati da quella revisione e non sono stati verificati indipendentemente qui.