Short Squeeze

Short sellers must eventually buy back the asset they borrowed and sold. If the price rises instead of falling, those losses grow with every tick upward. At some point — whether by choice or because a broker issues a margin call — short sellers buy back the asset to exit. That buying itself pushes the price higher, which pressures other short sellers to do the same. The result is a cascade of forced buying that can drive prices far above what supply-and-demand fundamentals alone would imply.

A short squeeze is most intense when short interest is very high (many traders have bet against the asset) and the market liquidity is thin (few willing sellers exist to absorb the buying). The combination means each forced purchase moves the price significantly, accelerating the squeeze. The 2021 episode involving certain heavily shorted US stocks became a widely studied example of how retail-investor coordination and social media amplified a classic squeeze dynamic.

Traders typically watch short interest ratios and the days-to-cover figure — how many days of average trading volume it would take for all short sellers to buy back their positions — as early warning signals of squeeze potential. A high days-to-cover number alongside rising price momentum is a combination economists read as elevated squeeze risk. Short squeezes also occur in commodity futures and crypto markets whenever leverage and concentrated short positioning coincide.