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What is a short squeeze?

What is a short squeeze?

A short squeeze occurs when many short-sellers attempt to cover their positions at the same time, and it drives prices up rapidly.

A short squeeze is a bottleneck situation where many investors who have sold a security short, suddenly become very interested in covering their positions - usually, because the stock starts on a strong uptrend. The squeeze will actually cause the price of the security to rapidly increase, more than it would otherwise, because so much demand has hit the security at once.

Ironically, this additional demand does not come from investors who are eager to hold a long position and ride the uptrend, but from short-sellers trying to cut their losses and get out. Investors watching the prices streak upwards may not be aware of this fact.

Short sellers were betting that prices were going to decrease for the security, and they stood to profit for their short positions in this case. However, when prices started going upwards, the short sellers rushed to cover their short positions, which they had to do at some point, before prices got any higher.

Keywords: covering, short squeeze, short position,