( NFLX) for example: On April 15th, Netflix had a short ratio of 16.5%. These formerly short investors then become long investors, pushing the stock even further, and causing even more short positions to close. So, when the price begins to rise, these short positions trigger stop losses, which in-turn close out the position buy purchasing a long position in the stock.
Given the risks involved with shorting a stock, these investors generally monitor their positions closely to avoid catastrophic losses. While this generally will not affect the price of a share, stocks with a substantial short interest may become flooded with these share purchases if a significant upside move occurs. In order to cover a short position, an investor must purchase shares in the marketplace. When the value of a heavily shorted stock begins to increase, the short positions lose money - the most fundamental concept behind shorting shares. On the other hand, if the stock gains a bit of upward momentum, the potential for acceleration is massive. Think of the short ratio as a gauge on bearish sentiment in the marketplace. Keep in mind however, having a high short interest should serve as a signal that something may be fundamentally wrong with the underlying business. In essence, short interest refers to the ratio of available shares that are being shorted in the marketplace. A short squeeze can occur when a company that has a high proportion of short interest compared to overall float sees a bump in share price. Heavily shorted equities (or currency pairs) provide investors with an interesting and lucrative opportunity to make a brisk profit- a potential short squeeze.
As explained, a short squeeze can provide investors with a tremendous opportunity to bank profits, if traded properly.
In an article I wrote yesterday ( Tesla's Short Squeeze is Here), I addressed a potential short squeeze in Tesla Motors, Inc.
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