Graphic on why a short squeeze happens

Updated: Jan 27, 2021

A short squeeze is when a large percentage of people who are "short" ( betting that the stock will go down) have to cover and close their positions.

This sends the stock soaring higher beyond expectations because the short sellers have to buy back their position at a loss and at higher bids.

Look at ticker symbols. GME,BB,SPCE. These are all stocks with large amount of the float taken up by short sellers 80% - 150% with GME being the leader. The float which is shown in picture below is what allows for the liquidity of the stock for investors to buy and sell the security.

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Top few reasons they have to cover:

In each case, the stock is going up.

  1. Short sellers close position in a loss.

  2. Short seller had bought on margin and brokerage margin requirements are reduced, forcing a sell of the position

  3. Brokerage forces closing the short positions to maintain liquidity in the stocks underlying float.

Hope this helps you in your investing journey,

Brad Mitchell

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