Three Stocks That Can Be Potential Short Squeeze Plays

 | Oct 19, 2023 06:15

For risk-takers, there are plenty of stocks with weak fundamentals. But short squeezes are unpredictable market beasts.
The crypto and stock market have had their share of short squeezes in recent years. Simply put, it’s a bet inversion. In the stock market, investors place a short position when they bet that a company’s shares will decline because they are overvalued.

This bet consists of borrowed shares from the broker, which shorters sell on the open market. If the bet materializes and the price of shares declines, short sellers can buy them back at a lower price and make a profit.

h2 Short Squeeze Volatility, Unlimited Loss, or Great Profits/h2

Yet, if some news turns bullish for the stock, triggering the price rise, short sellers are in a losing position as they are forced to buy back borrowed shares to cut losses. They must pay margin deposits to the broker to offset potential losses while keeping their short positions open.

This rising buying pressure feeds the demand, often increasing the stock price. In turn, more short sellers have to cover their positions. Suffice it to say that shorting an asset is a highly risky strategy with the potential for unlimited losses.

This is exactly what happened to now-defunct hedge fund Melvin Capital as it heavily shorted GameStop (NYSE:GME). Most recently, we have seen the power of shorting with Bitcoin as unexpected fake news on Bitcoin ETF approval resulted in $84.85 million in short liquidations on Monday.