How to Find Short Squeeze Stocks?

When the price of an asset or stock jumps sharply, and it forces the trader who was expecting price fall to bear massive losses is called a short squeeze.

Due to upward pressure on stock’s price, they can only scrabble to buy adds.

Short sellers prefer to buy shares of those assets that they believe will fall in price.

Short Squeeze

If their bet is right, they return the share and calculate the difference between the prices when they initiated and the actual sale and keep the profit.

On the other hand, if they were wrong on the bet, they will buy at a higher price, and they will pay for the difference between the set price and the sale price. Short sellers have options with expiry dates, so when stock prices jump higher, they want to act quickly to limit their losses. 

Why Short Squeezes Happen?

Short sellers open their positions in stock when they believe that price will decline. However, their reasoning can be logical and sound, but a positive news story, earnings beat, and the product announcement can excite buyers. It has been observed that in stocks, fortunes are temporary. But in case if it does not happen, then the short sellers can face losses as the expiration date of their assets approaches. Short-sellers seem to sell quickly; even this can result in a substantial loss. It is the place where the short squeeze becomes important. A short seller who sends the price higher forces another short seller to buy a position. 

How to Measure Short Interest? 

When the stocks are at the risk of a short squeeze, then two measures become critical such as, short-interest ratio and short interest. The total number of shares that are sold short as a percentage of total shares outstanding is called short interest. On the other hand, the total number of shares that are sold short divided by the average daily trade volume of the stock is called the short-interest ratio. Stable companies have a less short interest than speculative stocks. 

Short interest can tell you whether the investors’ point of view is changing about the company or not. Let’s take an example: if a stock has a short interest of 15% to 30%, then anything above or below this range means that investor’s view about the company has changed. When there are a few short shares, it means that prices are gone too high and too quickly, and that’s the reason why the short sellers are leaving the stock because the stock has become too stable. 

When the short interest goes beyond the normal, it indicates that investors have become more bearish. When the reading of short interest becomes extremely high, it is an indicator that short squeeze is coming soon, and definitely, it can force the price to go higher. 

Betting On Short Squeeze

Contrarian buyers prefer to buy stocks when interest rates are high because they want to exploit the potential for a short squeeze. Without any doubt, when there is a rapid increase in stock price, it looks attractive but minds that it is never risk-free. There is a good possibility that stock might become short because of a dismal future outlook. Active and experienced traders are always watching these short stocks and waiting for them to rise. When prices begin to gain momentum, the traders jump in to buy stocks and want to get the benefit of the short squeeze. 

The Risk of Trading Short Squeezes 

Lots of examples have been seen after massive short interests; stocks move higher. At the same time, there are so many stocks that keep falling in price after they have been massively shorted. A massive short interest never means that there will be an increase in price. It means that many people believe that price will fall. Traders who buy stocks in the hope of short squeeze must look for better and good reason for that a stock price will go higher. 

How to Use Short Squeeze to Your Advantage? 

As an investor, the first thing that you will have to look for is whether the stock is in decline or rise. Once you can identify a long-term trend, then you will have to look for a short position in the stock. This metric can tell you whether the short position is crowded or not. It has been seen that when the percentage of short float gets higher, there is a definite possibility of a short squeeze. However, only short stocks are not enough to predict a short squeeze, and you will have to look for other factors as well. Look for all the factors, and then you can use it to your advantage. 

Trading the Short Squeeze

You can trade short squeeze in lots of ways. As a successful trader, you can make a prediction when the short squeeze can occur. When you are trading in real-time, it can be difficult for you. As a day trader, you will have to consider all the fundamentals that can be responsible for the change in price’s direction. The best way to trade on a short squeeze is to pick stocks that have an interest rate of more than 30%. It gives you a clear indication of the bearish market. There is no perfect level for short interest, so you will have to keep a close eye on the stock. Sometimes, a short squeeze can occur in the middle of bad news. So because of the risk of repetition, day traders must be on their toes and understand the fundamentals of stocks. 

For trading the short squeeze, you can start by using the short interest filter along with some technical indicators such as the trading price below the 200-day moving average. When you can find a perfect combination of technical indicators along with a fundamentally driven short squeeze, then you can make money by trading the short squeeze. 

How to find short squeeze stocks? Most traders have this question in mind. So everything given-above is about how to find short squeeze stocks. 

Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.