A short squeeze occurs when a rapid rise in the price of a stock, precipitated by a lack of supply and an excess of demand, pressures short sellers to cover their positions on a stock, resulting in buying volume that drives the stock price up, further pressuring the remaining shorts. Factors precipitating pressure on short sellers can include margin calls, the inability to continue to borrow shares and simply deciding to cut losses.
Short squeezes are more likely to occur in stocks with small market capitalizations or small floats, but can involve large stocks and billions of dollars. For example, in October 2008, a short squeeze temporarily drove the price of Volkswagen from approximately 211 euros to over 1,000 euros in less than two days.
A short squeeze can cause an interesting dilemma for long term investors. What to do when your investment suddenly reaches levels you had hoped might be achieved over a period of years?
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA