How high can a shorted stock go?
If you short a stock at $10, it can't go lower than zero, so you can't make more than $10 per share on the trade. But there's no ceiling on the stock. You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million. There is no theoretical limit on how high a stock can go.
However, just because it's rare doesn't mean you shouldn't watch for it: a short interest of more than 100% is a prime time for the short squeeze, where the stock price can skyrocket due to short sellers rushing to cover their positions.
This is the opposite of a traditional long position where an investor hopes to profit from rising prices. There is no time limit on how long a short sale can or cannot be open for. Thus, a short sale is, by default, held indefinitely.
- What are short squeezes? ...
- The greatest short squeezes of all time. ...
- 1923: Piggly Wiggly short squeeze. ...
- 2008: Volkswagen vs Porsche. ...
- The big short on Herbalife. ...
- 2020: Tesla stock price rally. ...
- 2021: The GameStop surge.
Short interest can occasionally exceed 100%. For instance, if an investor owns shares of stock XYZ, their broker can lend those shares to short sellers. These sellers then resell the shares, which could be purchased by another investor, whose brokerage could, once again, lend them out to short sellers.
Short interest as a percentage of float above 10% is fairly high, indicating significant pessimistic sentiment. Short interest as a percentage of float above 20% is extremely high.
“It's simple: don't short stocks that are already heavily shorted,” Cramer said. “You're not only betting against the company, you're also betting that this won't become a controlled situation controlled by the longs, the buyers, who know that the more they buy, the less likely the short sellers can come out ahead.
The short seller hopes that this liability will vanish, which can only happen if the share price drops to zero. That is why the maximum gain on a short sale is 100%.
The maximum profit you can make from short selling a stock is 100% because the lowest price at which a stock can trade is $0. However, the maximum profit in practice is due to be less than 100% once stock-borrowing costs and margin interest are included.
Second, if the shorted stock rises significantly in value, the broker could issue a margin call, requiring you to add cash or securities to your account to cover the amount you borrowed. If the margin call isn't met (typically within two to five days), the broker can sell the stock, locking in your losses.
Who loses money in a short squeeze?
Who Loses and Who Benefits From a Short Squeeze? Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs.
At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month.
- Initial Share Price: $1.51.
- Lowest Price: $1.31.
- Peak Price: $3,773.08.
- Stock Returns Increase from Low to High: 287,472.76%
- Highest Day Return 1st September 1998: 33.27%
Search for the stock, click on the Statistics tab, and scroll down to Share Statistics, where you'll find the key information about shorting, including the number of short shares for the company as well as the short ratio.
Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal.
Symbol Symbol | Company Name | Float Shorted (%) |
---|---|---|
RILY RILY | B. Riley Financial Inc. | 76.26% |
IMPP IMPP | Imperial Petroleum Inc. | 64.89% |
AIRJ AIRJ | Montana Technologies Corp. | 59.64% |
GXAI GXAI | Gaxos.ai Inc. | 42.85% |
The short seller borrows those shares from an existing long and pays interest to the lender. This process is often facilitated behind the scenes by a broker. If a small amount of shares are available for shorting, then the interest costs to sell short will be higher.
A short interest ratio of five or better is a good indicator that short sellers might panic, and this may be a good time to try to trade a potential short squeeze.
If the shares you shorted become worthless, you don't need to buy them back and will have made a 100% profit. Congratulations!
Short selling a stock is when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit.
Can you lose more money than you invest shorting?
Potentially limitless losses: When you buy shares of stock (take a long position), your downside is limited to 100% of the money you invested. But when you short a stock, its price can keep rising. In theory, that means there's no upper limit to the amount you'd have to pay to replace the borrowed shares.
Risks of Selling Puts
The profit on a short put is limited to the premium received, but the risk can be significant. When writing a put, the writer is required to buy the underlying at the strike price. If the price of the underlying falls below the strike price, the put writer could face a significant loss.
Example of Short Selling-
The trader is now “short” 100 shares since they sold something that they did not own but had borrowed. The short sale was only made possible by borrowing the shares, which may not always be available if the stock is already heavily shorted by other traders.
Shorting Example
XYZ Corp. is trading at $50 a share. An investor borrows 100 shares and sells them for $5,000. XYZ Corp's price suddenly declines to $25 a share, so they immediately purchase 100 shares to replace those borrowed. Their profit is $2,500.
The rule is triggered when a stock price falls at least 10% in one day. At that point, short selling is permitted if the price is above the current best bid. 1 This aims to preserve investor confidence and promote market stability during periods of stress and volatility.
References
- https://www.investopedia.com/terms/s/shortselling.asp
- https://www.morningstar.ca/ca/news/234575/what-happens-if-a-companys-stock-falls-to-zero.aspx
- https://www.investopedia.com/ask/answers/05/maxreturnshortsale.asp
- https://en.wikipedia.org/wiki/GameStop_short_squeeze
- https://www.investopedia.com/ask/answers/012015/why-short-selling-illegal-some-countries-legal-us.asp
- https://www.investopedia.com/ask/answers/06/shortedstock.asp
- https://www.investopedia.com/terms/n/nakedshorting.asp
- https://en.wikipedia.org/wiki/Naked_short_selling
- https://www.investopedia.com/ask/answers/how-does-one-make-money-short-selling/
- https://www.investopedia.com/articles/investing/110614/why-short-selling-legal-brief-history.asp
- https://www.investopedia.com/terms/s/short-put.asp
- https://www.investopedia.com/ask/answers/12/how-long-short-sell.asp
- https://www.sofi.com/learn/content/what-happens-if-stock-goes-to-zero/
- https://www.5paisa.com/finschool/finance-dictionary/what-is-short-selling/
- https://www.investopedia.com/ask/answers/06/shortselling.asp
- https://www.disnat.com/en/learning/trading-basics/short-selling/what-is-short-selling
- https://www.fool.com/investing/how-to-invest/stocks/how-to-short-stock/
- https://www.thestreet.com/memestocks/gme/gamestop-stocks-short-sellers-have-lost-over-320-million-in-2023-so-far
- https://www.finra.org/investors/insights/short-interest
- https://www.businessinsider.com/personal-finance/what-is-short-selling
- https://groww.in/blog/what-happens-when-a-stock-is-delisted
- https://www.investopedia.com/articles/stocks/08/short-squeeze-profits.asp
- https://centerpointsecurities.com/ssr-stock-meaning/
- https://www.investopedia.com/terms/s/shortinterest.asp
- https://tradingqna.com/t/rule-on-short-selling/158637
- https://money.stackexchange.com/questions/126685/can-a-single-share-of-stock-be-shorted-multiple-times
- https://www.nerdwallet.com/article/investing/shorting-a-stock
- https://www.investopedia.com/terms/u/uptickrule.asp
- https://www.sec.gov/comments/4-627/4627-95.pdf
- https://www.investopedia.com/terms/s/shortsalerule.asp
- https://www.ig.com/en/trading-strategies/what-were-the-biggest-short-squeezes-in-history--210507
- https://www.investopedia.com/ask/answers/012915/how-long-can-trader-keep-short-position.asp
- https://www.investopedia.com/terms/s/shortsqueeze.asp
- https://www.cnbc.com/2023/07/11/cramer-says-to-avoid-shorting-stocks-that-are-already-heavily-shorted.html
- https://www.schwab.com/learn/story/ins-and-outs-short-selling
- https://www.investopedia.com/ask/answers/maintain-short-position-delisted-stock/
- https://www.kiplinger.com/investing/602165/what-exactly-is-a-short-squeeze
- https://www.investopedia.com/terms/s/shortsale.asp
- https://www.investopedia.com/ask/answers/05/shortsaleclosed.asp
- https://screenrant.com/dumb-money-gamestop-stock-story-left-out/
- https://www.investopedia.com/ask/answers/05/shortexceed50.asp
- https://www.marketwatch.com/tools/screener/short-interest
- https://www.thestreet.com/dictionary/short-selling-shorting
- https://service.betterregulation.com/sites/default/files/Guidance-on-MiFIR-Transaction-reporting-short-selling-indicator-v2.pdf
- https://time.com/6315779/dumb-money-real-people/
- https://www.thestreet.com/dictionary/short-interest
- https://public.com/learn/what-is-a-short-squeeze
- https://www.cmcmarkets.com/en-gb/explore/stock-returns
- https://www.sec.gov/comments/s7-08-08/s70808-318.pdf