A short squeeze happens when short sellers rush to cover positions, triggering a self-reinforcing buying spiral that sends prices soaring. GameStop in 2021 is the textbook example: retail traders forced hedge funds to lose billions. You can profit by scalping the quick move or riding the longer wave.
This is going to be the last scenario in this chapter, and it's going to be the most complex one. We already know how a short works, but what is a short squeeze? So on one foot, the short squeeze is basically when there is a sharp increase in the price of the stock, causing the short sellers to close their position and take a loss. That then creates another spike in price because again, they need to buy their shares back from the broker. As more buyers come in and the stock price rises, more short sellers need to close their position and buy more shares. And it's kind of like a snowball going down a mountain, which eventually causes an avalanche. And all this panic is fueled by the most pristine oil, which is the fact that shorts can lose more than 100% of their money. This chain reaction is actually being viewed by more buyers, so more buyers actually join the short squeeze, making everyone else want it more as well. This entire frenzy and fiasco is what we call a short squeeze. Like squeezing a lemon, we squeeze the shorties out. Now, the most notable example for a short squeeze is the GME short squeeze back in 2021. That short squeeze caused a rally in GME stock and actually caused major hedge funds to lose billions of dollars and actually close their short positions because of retail traders. Now, the short squeeze is the most magnificent and beautiful thing you can see. The stock that would barely move 5 to 10% suddenly moves 50%. And how can we benefit from it? You can either scalp the short squeeze, or if you're early enough, just ride the wave. So in short, no pun intended, the short squeeze is a situation where there is a sharp increase in price. Which causes short sellers to close their position. And because, as we said earlier, when a short seller wants to close his position, he needs to buy back his shares. The increase in demand causes the stock price to go even higher, and because of that, more buyers are willing to buy the stock. So when you think about it, it's kind of like a circle, and that is why we call it the short squeeze.
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