Short Squeezes
An interesting explanation of what short squeezes can do. I did not write this but found it so interesting.
Taser short interest is on its way to where it was in 2004 when all of the shares that could possibly be sold short, where sold short, which was over 50 percent of the entire float.The technical reality of this situation in the market place is interesting to consider. First, with no more shares left to short, the stock can not be held down by shorting, so the price tends to rise faster.Second, the short shares represent a promise to deliver shares that do not actually exist, and which are not actually owned. This sounds complicated, and is complicated, but the situation can be understood looking at 1 transaction.Long who owns 1000 shares, which are borrowed by short sellers, decides to take his profit when Taser is trading at $60 a share. He sells in the market, and his sell order is filled by some desperate short trying to cover their short position. The short interest finally goes down a little bit, because he covered, but at the same time those borrowed shares have to be delivered to the short who covered. That trigger another buy in the market place to cover the borrowed shares.The end result is simple. When the short interest reaches a maximum - in orther words a majority of the float, every sell order results in not 1, but 2 buy orders, and that drives the price up even further, creating a vicous circle for shorts.The whole thing just becomes a lose lose proposition for shorts, it doesn't matter what they do at that point, there is no getting around driving the stock price up to extremely high levels. "
Adding one more thing, the situation can be even worse for the shorts. If the longs sell order at $60 is filled by a new long, then the short interest does not go down, we still get 2 buys in the market. The first buy filling the longs sell order, and the second buy being from the short who has borrowed those shares and must cover them to deliver on the sale.The net result is that the new long is happy with the transaction since the price is actually driven up by the sale, and the short interest "equity" so to speak of Taser stock remains in place to provide further gains.We just call it a short squeeze. In fact, the situation is a complex set of affairs which drives the price up as surely as the promise of the sun rising tomorrow. "
Adjö
