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  • Writer's pictureIshfaaq Peerally

What is a Short Squeeze

One of my largest investments right now is GameStop $GME and there's the possibility of the stock going into a short squeeze. I am a fundamental analysis and short squeezes are in the realm of technical analysis. Nevertheless, they are quite an interesting phenomenon and if you know how to play them, you can make a lot of money or lose a lot money if if you play them the wrong way.

GameStop is a business in decline and many people understood that shorting the stock is a sure way of making money. To short a security, you need to borrow it from someone else, sell it on the open market and then buy it back at a lower price and return it to the owner. You keep the difference as your profit.

A short squeeze will happen if there's not enough shares to cover the short positions. Two short squeezes which happened recently are Tesla $TSLA and Blue Apron but the number of shares of Tesla or Blue Apron being shorted were nowhere near that of GameStop.Currently 250% of the float of GameStop are being shorted with 88% of the shares outstanding.

Another example of a short squeeze is Volkswagen Group $VOW3.DE which gained 400% in a single day in 2008 after the stocks was being acquired by Porsche. On that day, Volkswagen Group became the largest company in the world.

One of the reasons why the Dow Jones $DJ30 crashed by 22% on a single day in 1987 (Black Monday) is a short squeeze as investors were hedging their gains by shorting indices futures contracts without much liquidity in the real underlying stocks. Paul Tudor Jones was able to see that and made a lot of money that day.

Another short squeeze that may happen is in the US Dollar $USDOLLAR as countries take debt denominated in that currency. They want the dollar to weaken against their home currency and at the same time, they need Dollars to repay the debt. Therefore, they make the Dollar stronger. This is what caused the economies of Turkey and Argentina to crash recently.

Short squeezes can be very dangerous and I will not advice anyone trying to make money off them if there's no fundamentals to back it. I didn't invest in GameStop because I'm expecting a short squeeze. I invested because of the fundamentals. The short squeeze is just a bonus.

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