This article will introduce what is a short squeeze, the reasons for the short squeeze, the GME short squeeze event in 2021, and the risks of short squeeze trading.
What is a Short Squeeze?The reason for the short squeeze
A Short Squeeze is a trading term used to describe a rapid rise in the price of a stock. A short squeeze occurs when a stock that has been shorted suddenly gets good news or some kind of catalyst that causes a flood of new buyers to buy back into the stock. Short squeezes are not an uncommon situation, because for a short squeeze to occur, it means that the shorts have to take an unusually large position, but they get squeezed when the stock price jumps unexpectedly. .
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Three elements of a short squeeze:
Contrarian investors try to predict a short squeeze and buy assets that show strong short interest. The price of assets that are shorted will accelerate, as the short stops and quickly closes the position. The price increase attracts new longs, which together cause the price to rise rapidly.
2021 GME Short Squeeze
As COVID-19 ravaged the world in early 2020, countries closed their doors to curb the rapid spread of the virus, a drop in economic activity prompted central banks to cut interest rates, and governments introduced supportive fiscal policies, including cash handouts. Under the water released by global central banks, a large influx of retail investors, especially on the WallStreetBets forum on Reddit, is quite active. Not only that, but brokerage Robinhood has also risen during this period.
At the end of January and early February 2021, the long-short battle between retail investors and Wall Street institutions reached its peak. The stock price of American game station company GME soared 25 times in January, and then plunged 30% on February 1 and 60% on Tuesday, wiping more than $27 billion in market value from its peak. GME was the most shorted company by Wall Street institutions at the time, causing the risk of being short-squeezed, and a large number of retail investors gathered on social media to seize this short-squeeze loophole and become the fuse of this incident.
GME’s stock price was trading around $17 before the short squeeze, and the stock price soared to $483 after the short squeeze, an increase of nearly 3000%!
GME share price chart (January-February 2021)
Although this event appears to be a showdown between retail investors and institutions, from the final result, the biggest winners are the head short squeeze promoters and institutional investors.
Among the top nine profitable investors, seven institutional investors, except for company director Ryan Cohen and another individual investor, Foss, who is already a millionaire, reportedly made $12.1 billion. According to this estimate, the proportion of all long institutions profit is at least 75%. The head promoter of the short squeeze, Keith Patrick Gill, posted a floating profit of US$31.47 million on WSB, which is still far from the above nine, and his floating profit decreased by at least 10 million after the stock fell sharply on February 1. Dollar. Therefore, for retail investors, remember to follow suit in trading.
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In addition to GME, stocks that also suffered a short squeeze during this period were the world’s largest movie theater chain under China’s Wanda Group, and AMC Entertainment, which was on the verge of bankruptcy. During this period of time, the war between long and short was fierce, and the VIX volatility index, which represents risk, jumped up, causing a big shock in the financial market.
AMC share price trend (January-February 2021)
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