Get rich overnight or lose everything? Learn more about what short squeezing means.

There is an old saying in the investment market: “Long positions are steady, short positions are刺激.” Many people have vivid imaginations about short selling but often overlook the hidden deadly risk—short squeeze. So, what does short squeeze mean? Simply put, it is a nightmare for short sellers and a celebration for long investors.

Understanding What a Short Squeeze Means: From Concept to Phenomenon

Short squeeze (also known as “嘎空”) essentially refers to the rapid increase in the price of a stock or asset that has been shorted, forcing short investors to buy back at high prices, which further drives up the asset’s price. This is a self-reinforcing process— the more short sellers lose, the more aggressively they cover, and the higher the stock price climbs.

To understand what a short squeeze means, first, you need to grasp the three common ways to short a stock:

Borrowing stocks to sell: Borrowing shares from long-term shareholders, paying interest, and repurchasing them at lower prices to return to the original shareholders.

Futures or CFD contracts: Shorting through margin trading, facing forced liquidation risks when contracts expire or losses become excessive.

Risks involved: Regardless of the method, once the stock price rises beyond expectations, insufficient margin will lead brokers to force buy-backs, which is a precursor to a short squeeze.

The key to understanding what a short squeeze means lies in its reflection of an imbalance of market forces. When short positions are overly concentrated and the chips are unevenly distributed, any active buying can trigger chain liquidations, creating a “shorts being squeezed” scenario.

Historical Lessons: Two Classic Short Squeeze Events

GME Incident—Retail Investors Unite Against Wall Street

In 2020, the video game retail chain GME was in deep trouble due to declining business. After Canadian entrepreneur Ryan Cohen took a seat on the board, the stock price rose from single digits to around $20. Wall Street institutions immediately issued bearish reports, claiming the stock was severely overvalued, and began large-scale shorting.

What Wall Street didn’t expect was that GME had a relatively small float and limited liquidity, with short borrowings reaching 140% of the circulating shares. This number ignited investors on the US forum WSB (Wall Street Bets). They called on retail investors to buy collectively, aiming to “force Wall Street to admit defeat.”

The situation spiraled out of control: on January 13, 2021, the stock surged 50% to $30, and within two weeks, it peaked at $483 on January 28. Short sellers, due to margin calls, were forced to cover, with media reports indicating losses exceeding $5 billion for short positions.

A week later, the stock price plummeted over 80% from its peak. Subsequently, WSB users created similar scenarios with AMC, BlackBerry, and others—companies with high short interest experienced rapid rises and falls.

Tesla—Fundamental Reversal Triggering a Short Squeeze

Another form of short squeeze stems from fundamental changes. Tesla is a typical example.

For a long time, Tesla was regarded as the leader in electric vehicles, but repeated losses and limited sales attracted heavy short interest. It became one of the stocks with the highest short positions in the market.

The turning point came in 2020: the company turned profitable, its Shanghai Gigafactory revenue exploded, and the stock price began to soar. In just half a year, the price rose from 350 yuan to 2,318 yuan, nearly a sixfold increase. Later, a 1-for-5 stock split was implemented, and within a year, the price rose from over 400 yuan to over 1,000 yuan (peak at 1,243 yuan).

In just two years, Tesla’s stock price increased nearly 20 times. The losses for short sellers were comparable to the GME incident.

Behind Short Squeezes: Why Do Such Market Movements Occur?

Short squeeze events do not happen out of thin air; they usually require several key conditions:

High concentration of short positions: When a stock’s short interest exceeds 50% of the float, the market becomes a target for short covering. Small-scale short positions are often ignored, but overly concentrated shorts are like a warehouse full of gunpowder—any spark can trigger an explosion.

High market attention: The GME case became a classic because of retail investors’ collective power and social media amplification. When many investors simultaneously short a stock, contrarian traders can exploit this to create a short squeeze opportunity.

Fundamental or news-driven changes: Cases like Tesla, where industry shifts or company performance turnaround trigger buying surges, eventually leading to a short squeeze.

What to Do When Facing a Short Squeeze?

For short investors, a short squeeze is the most feared scenario. How can you protect yourself in such extreme market conditions?

First, monitor short positions: If short interest exceeds 50% of the float, even if the stock looks weak in the short term, consider early covering to cut losses. Small gains or small losses are acceptable; staying alive is the key to winning.

Second, observe technical signals: RSI indicator is an important reference. When RSI drops below 20 into oversold territory, it indicates the market price has deviated from rationality, and reversal chances increase. Short sellers should exit immediately; otherwise, once the short squeeze starts, losses can escalate rapidly.

Third, if choosing to go long to participate in the squeeze: Always monitor whether short positions are being covered. If short interest remains unchanged or increases, the squeeze continues. But once you see short covering begin, take profits and exit, because the upward move is driven purely by speculative buying, with no fundamental improvement, and prices will eventually revert to reasonable levels.

How to Avoid Short Squeeze Risks and Safely Short for Profit?

Given the high risk of short squeezes, how can investors avoid them?

Choose broad market indices or large-cap stocks: These assets have high liquidity and are less prone to concentrated short positions, making short squeeze risks more controllable.

Wait for rebounds before shorting: In a bear market, avoid rushing to short; wait for technical rebounds to increase success probability.

Prefer CFD contracts: Compared to borrowing stocks for shorting, CFDs use margin trading with controlled leverage, reducing the risk of forced liquidation.

Hedging strategies: Hold long positions in promising stocks while shorting market indices. If the stock outperforms the index or the stock’s decline is less than the index, you can achieve stable profits and effectively balance risks.

The ultimate answer to what a short squeeze means is that it is the Achilles’ heel for short sellers—what seems like rational judgment can become powerless in the face of market sentiment. For investors, more important than predicting the market direction is knowing when to fully exit at the right moment.