A short squeeze is a market event in which short sellers quickly close out bearish positions in a stock, leading to a dramatic surge in the share price.
Let’s say you borrow a stock trading at $10 and pay it back in 90 days. 90 days later, the stock trades at $5. You buy back and return the shares, making $5 profit a share.
Let’s say the investor borrows the $10 stock again. This time however, the share price shoots up to $15 in 90 days. The investor still has to buy the shares and return them.
Other investors are also covering their short, so there’s a shortage of shares. That causes the stock price to jump. To $20, $30, or $40. The spike in price is a short squeeze.
One famous example of a short squeeze in 2021 was video-game retailer GameStop, which jumped 2,300% in a few weeks as many investors wanted to profit off the high number short sellers in the stock.
To invest in a short squeeze, look for stocks that have many short sellers. Traders know that short sellers will have to buy back share – at any price – to return them.