Category Archives: Short Selling

What Is A Short Squeeze?

understanding a short squeeze

What is a Short Squeeze?

Should you love short squeezes? Should you fear short squeezes? Should you revere short squeezes? Can you predict short squeezes? What is a short Squeeze?

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With today’s biggest penny stock runner vTv Therapeutics (VTVT) being the result of a short squeeze I’m getting A TON of questions about this pattern so let me answer them all with this blog post.

But first lets get into understanding a short squeeze.

A short squeeze is what happens when short sellers trigger a rise in price on a heavily shorted stock as in order to close out their short positions, they are forced to buy to cover, creating heavy demand and usually all clamoring to get out as quickly as possible, thus squeezing each other out of their short positions and spiking the stock higher.

As you can see from VTVT’s morning spike today:

…the stock price can makes a huge spike as short sellers close their positions because they think the stock can go even higher, not lower like they initially believed when they first shorted. The ‘squeeze’ comes into play because short-sellers are literally being ‘squeezed’ out of their short positions. And the more that cut their losses and buy to cover their shorts, the bigger the squeeze.

This is all usually triggered by a positive development, particularly on a Friday, when people don’t want to be short going into the weekend when the market is closed and any positive news can spike the stock even more the following Monday.

As the overall stock market has risen dramatically tyhe past few years, it’s been pretty a rough time for short sellers and I’ve adapted by mostly going long using this go-to pattern that’s worked surprisingly well.

But even if you don’t like short selling you should most definitely learn about it as it’s good to know all about this catalyst that can REALLY spike a stock…as sometimes the worst companies in the world become the best performing stocks in the world and that leaves a lot of people scratching their heads.

That’s the BEST thing to love about a short squeeze, it’s GREAT if you’re holding a long position, so pay attention here, here’s one of the most fundamentally flawed companies in the world, DRYS, and its arguably biggest short squeeze of the past few years as the stock went from single digits to $100+/share in just a few days, and probably could’ve kept going if the SEC didn’t halt it and helped save short sellers galore caught in the squeeze:

The squeeze creates a buying flurry, and you can sell at a sweet profit as short sellers rush to close their positions–with your stock. If you want to make cash on a short squeeze, you have to look for stocks that have a high short interest.

What does that mean? It means stocks who have lots of short sellers who may need someday to cover themselves, although no short selling data is truly accurate or real-time so it’s a VERY imperfect science…use the short data from this tool as it’s the most accurate I’ve found.

Basically, you can bet against the short sellers and win, and it’s not quite as risky as short selling itself, but it’s also tough to judge which short squeezes will really go Supernova.

And of course going long is less risky than short-selling as since shorting involves margin and borrowing shares on a stock that could go wayyyyy past your initial investment, you could lose more money that’s not even yours (since you borrowed it using margin).

So if you’re holding a short position, and the price skyrockets, you would want to bail right awa, rule #1 is always cut losses quickly, ESPECIALLY as a short seller.

The large number of people/traders/funds exiting their short positions (which is really buying stock at the current price) can push the price up faster and higher than you ever imagined. This squeezes all the other short sellers into doing the same as panic sets in and traders rush to minimize losses…and that’s creates gigantic squeezes like DRYS.

And it’s important to remember that short squeezes are more likely to occur in stocks with small market capitalization and a small public float.

Choosing the stocks to play long on an expected short squeeze is the key, and there are certain rules to follow when trying to pick these stocks. I’ll throw the two most popular ones your way here, but remember the short selling data isn’t very accurate or up-to-date so take this all with a grain of salt:

#1 Time to Cover Ratio

You can get the time-to-cover ratio by taking the total short position (in shares) divided by daily average volume. What does this tell you, exactly? It tells you how bearish or bullish traders are on the stock. What you’re looking for is a stock that has a cover ratio in the double digits (for days) because these are the big targets for short-sellers. A five-day streak in double digit time-to-cover ratio is a good signal.

#2 Short Interest Percentage of Float

Short interest as a percentage of float is a second tool for squeeze-spotting opportunities. The float is the percentage of a company’s stock that’s traded on the market. A short interest above 20% is considered high.

If you see a 10%-er, then this is already in the danger zone—meaning, it’s already inching towards that long opportunity to make money off the short squeeze that’s going to push short sellers out.

The ratio can be calculated by dividing the number of shares sold short by the average daily trading volume over the last 30 trading days.

I’ll use this example from Investopedia: “If 5 million shares are shorted and there are 20 million tradable (or floated) shares, the short interest is equal to 25%.”

Or, you can forego the math and use StocksToTrade, and put all the cool filters to work for you to find your best short squeeze opportunities, namely by using the social media scanners and seeing which big % gainers have the most people talking smack about as they’re likely short sellers getting crushed and trying to persuade others on social media into also shorting and thus help save them a little…while they usually fail since most short sellers are cynical little trolls, not popular people who can persuade anyone to anything LOL! (trust me I used to mainly be a short sellers so I know them well…thankfully I adapted while I know too many people who can’t adapt and have this gotten wrecked the past few years as shorting is VERY tough unless you have a big account and can risk losing big like this great short seller)

Leave a comment below and let me know if this blog post helped you, I’m always looking for some feedback!

10 Things You Should Know About Short Selling

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Given that literally today is the day that all of the major US stock market indices are breaking below key multi-month support levels, now is a good time to brush up on your short selling skills, as you don’t need to fear crashes or bear markets if you learn to profit from them! Continue reading

Bull vs Bear: Should Your Trading Strategy Change?

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With the US stock markets suffering their worst drop in years last week, I know a lot of you are panicking. And I know you’re panicking because you’ve been sending me emails freaking out about whether all of this – not to mention the fact that most of the big & popular companies mentioned daily on CNBC are down – means that stock trading is over.

It’s not. Continue reading

Short Selling Advice From A Billionaire Trader

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Yesterday I posted such an important video lesson on what exactly the SSR (short-selling restriction) is, I encourage alllllll my newsletter subscribers to go watch it ASAP as it influence every single one of my short selling trades, even some of my long trades too (when I buy in anticipation of a short squeeze) Continue reading

When Penny Stocks Squeeze Short Sellers

Much has been made of CYNK, which is one of the best examples of a penny stock short squeeze, with over 500 articles in the mainstream press all focusing on the company’s “social media website” and their marketcap, ignoring the reality of the situation that it’s simply a great penny stock short tradisqueeze, mainly because they just don’t understand that kind of terminology (perhaps they should watch these penny stock video lessons!)

Download the key points of this post as PDF.

See my blog posts on the situation HERE and HERE and I also just gave this interview to the NY Post the this past weekend for the article published today entitled “Cynk, penny-stock ‘star,’ continues tumble”

Here’s some of that great interview: Continue reading

10 Short Selling Basics To Know

I’ve locked in profits of nearly $500,000 in the first 3 months months of 2014, but with the overall US stock market turning bearish and speculative stocks hyped by penny stock pumpers like this getting crushed, it’s time we take a step back from being so bullish and remembered you can make money when the stock market drops thanks to short selling.

I HIGHLY encourage you to see which brokers are best for short selling and to watch this study guide on short selling and to watch these 2 GREAT short selling live trades:

…read below for some more basics: Continue reading

Why This $270 Million Company With $455 In Sales Should Drop 40%

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While I’ve enjoyed trading profits of over $130,000 in the first 2 weeks of 2014, I got a little too aggressive and lost $9,000 late last week, see lessons from that loss HERE

The good news is that much of my gains come from the newly-hot sector of marijuana stocks as I discussed in this interview, as ever since weed became legal in Colorado, this sector has been on fire…and that creates a ton of volatility both on the long and short side.

Just as my top trading challenge student and I discussed on FOX the other night: Continue reading

10 Things You Must Know In Order To Short Sell Successfully

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This is a GREAT guest post from a trading challenge student who has fallen in love with short selling…rightfully so as these free video lessons teach: Continue reading

3 Notes About Short Selling

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This is a basic but important post about short selling by a new trading challenge student…remember, less than 10% of traders do well shorting, far too many think they can just short overvalued companies or a scam and be right eventually…tell that to current shorts in UNXL 🙂 Continue reading

This Penny Stock Broker Just Went Bust & Here Are 4 Great Ones

UPDATE: A new specialized broker for short selling for those who can afford their account minimum of $30,000 has emerged, please contact me HERE for a personal introduction, I don’t want word getting out about their superior service so I’m only going to introduce a few lucky people.

What a difference a few weeks make!

2013 has gotten off to a great start as I’ve profited nearly $20,000 in 2 weeks of trading…see all my trades here….we released brand new trading software called, my VIP students, my trading challenge students are banking and views of my 7 free video lessons are at an all-time high.

A few months ago I wrote this post about the best brokers for short selling penny stocks, but as usual the list has changed. In fact, it’s only been 3 weeks since I wrote an updated post on the best penny stock brokers for 2013, but now even that list is dated. Continue reading