A short squeeze is a phenomenon that occurs in the financial markets, particularly in the stock market, when there is a rapid increase in the price of a stock that has been heavily shorted.

The main components of a typical short squeeze are:

• Short Selling - Short selling is a trading strategy where an investor borrows shares of a stock and sells them on the open market with the expectation that the stock's price will fall
• Short Interest - Short interest refers to the total number of shares of a stock that have been sold short and not yet covered
• Squeeze - As the stock price rises, short sellers may face increasing losses, and to limit their losses, they may need to buy back the borrowed shares at a higher price
• Buying Pressure - As more short sellers rush to cover their positions, the demand for the stock increases, creating a cascading effect
• Feedback Loop - The rising stock price forces more short sellers to cover, creating a feedback loop of buying pressure and price increases
• Margin Call - Short sellers often use borrowed money to execute their short trades. If the stock price rises significantly, it may trigger margin calls, where brokers require short sellers to deposit additional funds to cover potential losses

As already mentioned above, a notable example of a short squeeze occurred in 2020 and 2021, when a popular stock trading subreddit identified major short interest in the stocks of GameStop, AMC, Bed Bath & Beyond, and a few others. 

Once the traders started buying these shares, more and more participants entered the market to capitalize on the upward momentum, which resulted in devastating losses to institutions, who had shorted many retail companies with an expectation that their business models were outdated and the stock would eventually fall even further. 

To cover their positions, these funds and institutions were forced to buy back at higher prices, which resulted in a cascading effect on the stock, dealing billions of dollars in losses to the short-sellers. 

We can see the effects of the GME short squeeze on the chart below:

As we can see, the price shot up dramatically in 2021, which came as a huge surprise for most market participants, as news of GameStop’s struggling brick and mortar business model had been circulating for years. 

Long after the short squeeze, GME is still trading considerably higher than it was before the squeeze occurred, returning a net gain for even the most conservative shareholders of the company. 

• A short squeeze is a market phenomenon that happens when the price of an instrument that has a lot of short interest starts to rise and triggers margin calls for short-sellers
• Those who shorted the stock face losses as their negative bets turn against them, which can quickly spiral out of control
• A notable example of a short squeeze occurred when the price of GameStop surged in 2021 
• The rush to cover positions amplifies buying demand, triggering a cascade effect and leading to a volatile surge in the stock's value