Biggest short squeezes in history

Short squeezes can be some of the most dramatic events in the financial markets. Some of them happen quietly, while others make headlines and result in hedge funds losing billions of dollars while retail traders make a fortune.

In this blog, we share what short squeezes are, how they work, what causes a short squeeze, and some of the biggest short squeezes in history.

Understand the concept of a short squeeze

Before we get into the juicy details of the world’s most infamous short squeezes, let’s look at what exactly a short squeeze is and how it happens.

Definition of a short squeeze in stocks

Short squeezes happen when heavily shorted stocks suddenly surge in price, forcing short sellers to buy back shares to limit their losses. This sudden rush of buying pushes the stock price higher, creating a cycle of rising prices and more buying.

Here’s how a short squeeze occurs:

Short sellers borrow shares and sell them on the market, hoping the price will fall so they can buy them back later at a lower price and make a profit. But if the price unexpectedly goes up, short sellers start to lose money.

To avoid even bigger losses, short sellers are forced to cover their positions by buying back the stock at the current (higher) price. This wave of buying adds more demand to the market, pushing the price up further. With more short sellers rushing to cover, the price can spiral even higher.

What short interest means

Short interest refers to the total number of shares of a stock that have been sold short but not yet closed out. It essentially shows how many investors are betting that a stock’s price will go down.

This is usually expressed as a percentage, where the number of shorted shares are divided by the number of outstanding shares. For example, if a company has 10 million shares outstanding and 1.5 million have been shorted, the short interest would be 15% (1.5 million / 10 million).

So, why does this matter? When short interest is high, it suggests that many traders believe the stock’s price will fall. But if the price unexpectedly rises, all those short sellers might be forced to buy back shares, increasing the chance of a short squeeze.

Short interest data is regularly published on exchanges like Nasdaq. Other metrics traders might look at when identifying a potential short squeeze include:

• Short interest ratio: Also known as ‘days to cover’, this tells you how many days it would take short sellers to cover their positions, based on the stock’s average daily trading volume. High ‘days to cover’ means it could take time for short sellers to exit, which can increase the chances of a short squeeze.
• Short interest percentage: This shows the scale of short-selling compared to available shares and gives a sense of how much bearish sentiment is in the market.

Differentiating short squeezes from related market events

Besides short squeezes, there are two other types of squeezes that can drive sharp price movements. These are gamma squeezes and long squeezes:

Short squeeze vs. gamma squeeze

To reiterate, short squeezes happen when short sellers are forced to buy back shares to cover their positions when a stock’s price rises. This adds buying pressure that causes prices to surge even higher.

Gamma squeezes, on the other hand, come from the options market. These happen when market makers (the firms that sell options) need to hedge their risk by buying the underlying stock. For example, if traders buy a lot of call options (betting that a stock will go up), market makers might buy shares to protect themselves from big losses. This hedging activity can push the stock price up even further, creating a feedback loop.

Sometimes, short squeezes can overlap with gamma squeezes. We saw this with GameStop in 2021 (more on that later).

Short squeeze vs. long squeeze

Long squeezes are basically the opposite of a short squeeze. These happen when a stock’s price falls suddenly, causing long investors to panic-sell to limit their losses. This selling can create even more downward pressure, accelerating the stock’s price drop.

So while short squeezes push prices up, long squeezes push prices down.

Causes behind a short squeeze

Now we know what short squeezes are and how they happen, let’s look at some of the causes behind them.

Market conditions that trigger squeezes

Here are some factors that can trigger a short squeeze:

• High short interest: This means that a large percentage of the stock's available shares (the ‘float’) have been sold short. The higher the short interest, the more potential there is for a squeeze if prices start to rise.
• Low float: This means that there aren’t many shares available for trading. When demand increases, especially from short sellers trying to cover, there may not be enough supply. This causes prices to jump even more.
• Unexpected bullish news: Positive news, like better-than-expected earnings or new product announcements, can change market sentiment quickly. Suddenly, the negative bets made by short sellers begin to look risky and they’ll start flocking to exit.
• Retail investors & social media:Retail traders can amplify price movements through viral posts, coordinated buying, or building hype on social platforms like Reddit, X, and Discord. Once again, the 2021 GameStop short squeeze is an excellent example of this.

How short squeeze stocks behave

During a short squeeze, a stock will see a rapid increase in price as short sellers cover their positions. Trading volume will also spike as more traders jump in, and volatility will be high, with large and fast price swings.

Risks of short selling

Short squeezes are just one of the risks associated with short selling. Some other risks include:

• Unlimited loss potential: When you buy a stock, your losses are capped to the amount you invested in it. But with short selling, there’s no cap on losses since a stock’s price can rise indefinitely.
• Margin calls: Short selling usually involves borrowing through a margin account. If the stock’s price rises, you may need to add more money to your account to meet margin requirements. If you fail to do so, your broker could close your position automatically.
• Rising borrowing costs:The costs involved with borrowing shares can change suddenly in response to supply and demand. This could make it more expensive to keep a short position open.

The biggest short squeezes in history

Let’s take a look at some of the famous examples of short squeezes.

The 1923 Piggly Wiggly short squeeze

Piggly Wiggly was the first self-service grocery store in the United States. It was opened by Clarence Saunders in 1916, and listed on the New York Stock Exchange (NYSE) in the early 1920s.

When traders started to short Piggly Wiggly stock, Saunders wasn’t happy. He used his own money plus $10 million loaned from banks to secretly buy up as many shares as possible. By March 1923, Saunders owned nearly every Piggly Wiggly share, except for around 1,100.

At that point, he demanded the short sellers cover their positions. The next day, the NYSE stepped in and temporarily stopped trading all Piggly Wiggly stock. This gave the short sellers time to buy up the few remaining shares and close their positions without having to buy from Saunders.

In the end, Saunders was left holding nearly all the stock but unable to sell it on the public market. On top of that, he owed the banks millions of dollars. He was ultimately forced to file for bankruptcy.

The 2008 Volkswagen short squeeze

In 2008, Volkswagen briefly became the most valuable company in the world, all thanks to a surprise announcement by Porsche.

Porsche had held a minority stake in Volkswagen for a long time. But in October, the company revealed it had quietly built up control of more than 74% of Volkswagen’s voting shares by buying up most of its circulating stock. At the time of the announcement, roughly 12.5% of Volkswagen’s stock was held by short sellers betting the price would fall.

The next day, the short sellers scrambled to cover their positions, driving Volkswagen’s share price from €348 to €999 per share in just two days. Porsche’s CEO was later investigated for market manipulation, but the charges were ultimately dropped.

The Herbalife short squeeze

In 2012, hedge fund manager Bill Ackman shorted the supplement company Herbalife, calling it a pyramid scheme that would surely go bust. He backed his claim by spending $1 billion shorting the stock, which was trading at around $45 at the time.

However, a rival hedge fund manager, Carl Icahn, decided to bet against Ackman’s prediction. He built up a 26% stake, becoming Herbalife’s largest shareholder. When Ackman’s hedge fund exited their short position, Herbalife’s stock was trading at more than $90, making it one of the most famous failures on Wall Street.

Meanwhile, Icahn’s bet netted him $1 billion over the next few years, and Herbalife is still in business today.

The 2020 Tesla stock rally

Tesla’s stock rally in 2020 is often described as a slow-motion, but massive, short squeeze. At the time, Tesla was the most shorted stock in the world, with many on Wall Street believing it was overvalued at $300 per share.

But a mix of strong earnings, growing excitement around electric vehicles, and the announcement of a stock split helped drive the price even higher. The squeeze was slow, but by the end of 2020, Tesla’s shares had soared to almost $700, costing short sellers an estimated $40 billion in losses.

The 2021 GameStop surge

In early 2021, a group of retail investors on Reddit’s r/WallStreetBets triggered one of the most famous short squeezes in history. GameStop was a struggling video game retailer that had more than 140% of its public float sold short. On Reddit, hundreds of thousands of retail investors joined forces to buy up shares and drive the stock’s price up.

During the rally, GameStop’s stock went from $17.25 to nearly $500 at its all-time-high. Short sellers were forced to buy as much stock as possible to cover themselves, driving prices up even further. The surge crushed hedge funds like Melvin Capital, which faced nearly $7 billion in losses.

How to find potential short squeeze opportunities

Some traders specifically look out for stocks that might be set up for a short squeeze. Here’s how you can find these trading opportunities.

Tracking high short interest stocks

One of the first things traders check is short interest, which is the percentage of a company’s shares that have been sold short but not yet covered. You can track stocks with unusually high short interest using tools like MarketBeat and Shortsqueeze, which have short screeners.

Some indicators to watch out for are:

• Short float %: The percentage of the stock’s available shares that are sold short.
• Average daily volume: How actively the stock is traded.
• Borrow rate: The cost to borrow shares for shorting. If the borrow rate is rising, it suggests growing demand and risk (short sellers also pay interest to the lender).

Identifying stocks with the highest short interest

As a general rule of thumb, a short interest above 20% is often considered high. Some traders might specifically focus on stocks with short interest over 30% or 40%, since they’ll have the most squeeze potential.

Momentum traders often use short squeeze watchlists to monitor for signs of upward price movement. These lists can be found on websites like Squeeze Finder.

Using fundamentals and sentiment as filters

It’s also worth combining short interest data with other information, like:

• Positive earnings reports, product announcements, or other industry news that could act as a catalyst
• Technical indicators like the Relative Strength Index (RSI), which can show if a stock is oversold and due for a bounce
• Monitoring social media platforms to gauge investor sentiment.

It’s important to note that, while it can be exciting to chase short squeeze stocks, these rallies are often short-lived and extremely volatile. They can reverse just as fast as they climb, and if you’re late to the game you could end up with steep losses. Be sure to always manage market risk carefully and avoid chasing unsustainable upward momentum without a solid strategy in place.