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 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 >>
  2. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
  3. How does short selling help the market and investors?

    Find out how short sellers provide a service to the market by acting as a check against overvalued companies and exposing ... Read Answer >>
  4. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. 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. Trading

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
  3. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  4. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  5. 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.
  6. Financial Advisor

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  7. Investing

    Finding Short Candidates With Technical Analysis

    Learn how to distinguish tops and bottoms in the equity market when short selling.
  8. Trading

    Using The VIX For Shorting Opportunities

    Find out how to use this tool to identify opportunities.
  9. Investing

    5 Popular Stocks with Short Squeeze Potential (FIT, GME)

    A short squeeze can lead to big gains and make your year (if the risks aren't too great). Here are five stocks with short squeeze potential.
RELATED TERMS
  1. Short Sale

    A short sale is the sale of an asset or stock unowned by the ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to ...
  3. Weak Shorts

    Weak shorts refer to traders or investors who hold a short position ...
  4. Days To Cover

    A measurement of a company's issued shares that are currently ...
  5. Crowded Short

    A crowded short is a trade on the short side with a large number ...
  6. Short Interest Ratio

    A sentiment indicator that is derived by dividing the short interest ...
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center