However, a week later, on February 4, the price was already sharply lower at $53.50. For example, during GME’s short squeeze, prices skyrocketed to $347.51 on January 27, 2021. Taking part in a short squeeze can potentially yield a lot of money, but it also involves high risks.
This even made the group the largest company in the world. Within five days, Volkswagen's share price increased fivefold to €999. When this became known, the short-sellers fled from their positions. At the same time, rival Porsche increased its minority stake from just over 40% to 74% of Volkswagen shares through options. A large short position was built up, up to approximately 12.5% of the number of outstanding shares. Hedge funds thought that the German carmaker would not survive the major financial crisis and speculated massively on a price drop. One of the biggest short squeezes took place in Volkswagen shares in 2008. This is calculated by looking at all long and short positions in shares and derivatives in the company concerned. In Europe, short-sellers are required to disclose their position as soon as it exceeds 0.5% of the issued capital. Companies in which more than 10% of the shares are short positions and with a market capitalisation of less than €1 billion are most at risk of a squeeze. On the online forum Reddit, private investors drove the price up by hundreds of percent, and short-sellers were forced en masse to take their losses.
The American computer game chain thus formed an ideal target for investors to cause a short squeeze.
In other words, more short positions had been taken than there were freely tradable shares. In the spring of 2020, the number of shorts stood at over 100%. This happened, for example, with GameStop (GME). The more short-sellers there are in the stock, the greater the chance of a short squeeze. There must already be many short positions outstanding. Conditions for a short squeezeĪ short squeeze cannot occur with every stock. The explosive price rises ensure as it were, that the short-sellers are squeezed out of their positions. This creates a snowball effect of rapidly rising prices, reinforced by the stop-loss orders. The purchases cause the price to rise, which, in turn, causes other short-sellers to close their positions. They then unintentionally have to buy back shares at lightning speed in order to avoid losses or to safeguard their profits. It happens when short-sellers are surprised by a sudden sharp rise in the price, for example, if good news about the company unexpectedly comes out. What is a short squeeze?Ī short squeeze is the worst nightmare for short-sellers. Positions are then automatically closed when the price hits a certain level. To limit the potential loss, most short-sellers use a stop-loss order. But because the price of a stock has no limit upwards, the theoretical loss for a short-seller is unlimited. Investors who simply buy a share, or go long, can, in the worst case, lose their investment if the price goes all the way to zero.
#VOLKSWAGEN SHORT SQUEEZE PROFESSIONAL#
Professional investors, such as hedge funds, often engage in short selling. But if the price rises, the short-seller suffers a loss because they have to buy back the shares at a higher price. The difference between the sale and purchase price is the profit for the short-seller. If the price subsequently falls, the short-seller buys the shares back at the lower price and gives them to the lender. A short-seller sells shares that they do not own but borrows from other investors, such as pension funds. Anyone who wants to profit from a price drop can go short.
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