A short squeeze occurs when a stock, or other security, goes up dramatically in price due to a lack of supply in the market. This often happens when a large number of investors have placed bets or sold shares that they expect will go down in price. When the share prices unexpectedly begin to rise, the investors that have bet against the stock find themselves in a difficult situation, as they have to buy back the stock in the open market to cover the difference. This influx of buying activity drives up the price further, resulting in a short squeeze.

Short Squeezes often occur in markets where there has been a large amount of short selling, meaning investors are betting on a stock to go down rather than up. ’Shorting’ is a risky endeavor that many experienced traders will opt into as a hedge during times of market uncertainty. When the opposite of what was anticipated occurs, a ‘short squeeze’ happens.

Contrarian investors may buy into a stock that appears to be in a short squeeze in the hopes of profiting from a price increase as the squeeze continues. This can be a risky move, and contrarian investors take the risk in a bid to capitalize on the opportunity. A wise investor would look for additional indicators, such as a rising earnings report, an increase in analyst coverage, or the introduction of new products before placing a bet.

A short squeeze can be a challenging event for traders and investors alike on both sides of the equation. The short seller who bet against a stock that is rising unexpectedly can be hit with heavy losses, while at the same time, contrarian investors who take the risk of buying a stock that is already in a short squeeze can be rewarded if the price continues to increase. No matter the outcome, both sides of the equation should have additional reasons for their strategy beyond the presence of a short squeeze.