What is it that may put a stock on a meteoric rise? In 2021, we saw a number of stocks make truly staggering jumps, doubling in price on consecutive days. There are several factors that contributed to these gargantuan moves, but one is surely the classic short squeeze.
While there are some new factors at play in the markets today, the short squeeze has been around provided that shorting stock.
What is a short squeeze?
Shorting a stock involves borrowing the stock, usually from the broker, and selling it now in hopes of buying it back later for less to be able to make a profit.
A short squeeze is when a shorted stock's price goes up rather than down, forcing the short seller to choose between covering their position by continuing to pay interest on the borrowed shares in hopes the cost will go down or exiting their position by buying shares at the new higher price and returning them at a loss.
What Is Delta Hedging, And Why It Matters In A Short Squeeze
Delta hedging requires the market makers to buy stock. And because of the nature of calls, when the buying price of the underlying stock goes up, the market makers have to buy more stock to keep hedged.
We may call this the decision option squeeze.
The problem is that these moves aren't centered on any fundamental changes in the stocks.
Not much has changed for GME stock since it had been a $4 stock, and most certainly not since it had been a $16 stock.
Brokerage firms are very worried about the volatility of the moves, as they know they might face losses if customers can't cover positions. They started limiting the positions which can be taken in some of these names.
That news came on Jan. 28, 2021, which saw GameStop stock price range from over 500 to below 115.
This is a trade you wanted to view out for. While some hedge funds were hurt and some retail traders made fortunes — at least written down — this still may end badly.
The bottom line
A short squeeze is bad news for short sellers and good news for investors going long. The "squeeze" forces short sellers to buy, raising the buying price of the stock, that causes them to reduce money. Investors (buyers) benefit because the stock price goes higher. As more short sellers exit, the cost goes higher causing short sellers to reduce more and buyers to get more https://scamrisk.com/shortsqueeze-review/.
Watch for any of the indicators a short squeeze may be coming, such as increased buying pressure, high short interest, days to cover above 10, or an RSI below 30. Most of all, you must understand that the possibility of a short squeeze makes short selling risky. Don't go there if you understand and accept that risk.
Comments
Post a Comment