A rapid rally driven by short sellers being forced to buy back shares, which pushes price higher and forces more covering.
Squeezes need high short-interest, a catalyst, and often a low float. As price rises, shorts face margin-calls and buy to cover, and their buying is the fuel. The move is violent and ends when the shorts are gone.
Squeezes are not sustainable rallies; they are mechanical. Buying late in one is buying from the shorts who are covering.
Example: a stock with 140% short interest rises from $20 to $480 in three weeks in January 2021 as shorts are forced out, then falls to $40 within a month.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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