A:

"Squeezing the shorts" refers to a questionable practice in which a trader takes advantage of a stock that has been short sold substantially by buying up large blocks of the stock. This causes the stock's price to increase and forces short sellers to attempt to buy the stock in order to close out their positions and cut their losses. However, because the trader has bought up large blocks of the stock in question, the short sellers may find it very difficult to buy stock at a price that they prefer. The trader can then sell the stock to the desperate short sellers at a higher premium.

Squeezing the shorts can also be done with commodities that are traded through futures contracts. In this case, What traders would take long positions in the futures contracts involving a certain commodity at a low price and then would try to purchase the entire supply of that same commodity. If the trader was successful, anyone who was holding a short position in the futures contract would have to buy the commodity at a higher price just to be able sell it back at a lower price, which is clearly an unfavorable outcome for a short-sale transaction.

Squeezing the shorts is very difficult to achieve. For example, in the 1970s, Nelson Bunker Hunt tried to squeeze the shorts in the silver market. At one point, Hunt and his associates had acquired more than 200 million ounces of silver, which caused silver prices to move from around $2 per ounce in the early 1970s to nearly $50 per ounce by 1980. Unfortunately for Hunt, maintaining a stranglehold on an entire market is very difficult. In this case, regulators decided to put a stop to Hunt's manipulation by implementing higher margin requirements and limiting the amount of contracts that any one trader can hold. Eventually, Hunt's scheme failed and he was forced to declared bankruptcy.

To learn more about futures, see Futures Fundamentals

RELATED FAQS
  1. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  2. How is the short interest of a company related to a short squeeze of a company?

    Learn about the short interest and short squeeze, how to determine if a stock is a short squeeze candidate and how short ... Read Answer >>
  3. How does days to cover a short position relate to a short squeeze?

    Learn about days to cover and how it relates to a short squeeze. Smart traders can use this metric to help them avoid getting ... Read Answer >>
  4. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  5. How does holding period return yield differ between short and long positions in the ...

    Learn how holding period return yields differ from short and long positions due to a number of factors and shorting comes ... Read Answer >>
  6. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
Related Articles
  1. Trading

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  2. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  3. Trading

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  4. Investing

    Short Interest: What It Tells Us

    A stock’s short interest is the total number of shares that investors have sold short but have yet to close.
  5. Investing

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
  6. Investing

    Trading Gold And Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  7. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
RELATED TERMS
  1. Short Interest

    The quantity of stock shares that investors have sold short but ...
  2. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  3. Short Covering

    Buying back borrowed securities in order to close an open short ...
  4. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  5. Short Selling

    Short selling is the sale of a security that is not owned by ...
  6. Silver Thursday

    A steep fall in the price of silver that occurred on Thursday ...
Hot Definitions
  1. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
  2. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  3. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  6. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
Trading Center