What does "嘎空" mean? How should investors respond to short squeeze market movements?

Global financial markets are becoming increasingly volatile, and more investors are exploring short-selling to seek diversified returns. The common saying is “Long positions are steady but slow, short positions are quick but risky,” with the biggest threat to short sellers being a short squeeze. This article will delve into the core meaning of a short squeeze and provide practical strategies to respond.

1. What is a Short Squeeze and the Basics of Short Selling

What is a short squeeze?

Short Squeeze, also known as “軋空,” refers to a phenomenon in the financial markets where the price of an asset being shorted rises rapidly, forcing short investors to cover at high prices, which further drives up the asset’s price. In simple terms, it is a nightmare for short sellers and a feast for longs.

Short squeeze events can be categorized into two types:

1. Passive Short Squeeze: The stock price rebounds sharply, and short sellers are forced to close their positions early due to margin pressure.
2. Active Short Squeeze: Well-funded groups intentionally push up the stock price to force short sellers to cover at high prices and profit from the movement.

Three Ways to Short Sell

Investors without stocks but optimistic about a decline can participate through:

1. Borrow and Short Sell Borrow stocks from long-term shareholders, sell them after paying interest, and then buy back at lower prices to return, profiting from the price difference.

2. Futures Trading Deposit margin to short the underlying asset, but face rollover mechanisms at expiration. If the stock price rises unexpectedly, margin may be called, or positions may be forcibly closed.

3. Contract for Difference (CFD) Also based on margin, no need to roll over positions but carries the risk of liquidation. Among these, CFDs are most popular among professional investors due to their flexibility.

2. Why Do Short Squeezes Occur? Understanding Market Dynamics

Short squeezes do not happen out of nowhere; they usually originate from two main pathways:

Man-made manipulation inducing a short squeeze

GME Event: A Classic Battle Between Retail Investors and Wall Street

GameStop (GME), a retailer of gaming hardware and software, was long bearish due to declining business. In September 2020, Canadian entrepreneur Ryan Cohen took a major stake and joined the board, sparking market imagination. The stock price soared from single digits to nearly $20.

Subsequently, multiple Wall Street institutions issued bearish reports, claiming GME was overvalued, and began large-scale shorting. Surprisingly, the shorted shares even exceeded GME’s float, with a short interest reaching 140%, meaning each share was shorted 1.4 times.

The turning point came on Reddit’s stock discussion forum WSB (Wall Street Bets). Aggressive retail traders called for a coordinated buy-in to fight against Wall Street shorts. In January 2021, the stock price skyrocketed from $30 to $483 within two weeks, a gain of over 1500%.

Short sellers, due to margin calls, were forced to cover massively, with media estimating losses exceeding $5 billion. Ironically, after the event, the stock price quickly fell back, dropping over 80% from the high by early February.

Later, WSB retail traders also speculated on heavily shorted stocks like AMC and BlackBerry, which experienced short-term surges followed by rapid declines.

Natural Short Squeeze Driven by Fundamentals

Tesla: From Losses to Profits in a Stunning Turnaround

Tesla’s short squeeze story is quite different. Under Elon Musk, Tesla demonstrated technological strength but had long-term losses, making it one of the most heavily shorted tech stocks.

The turning point came in 2020 when Tesla achieved its first annual profit. The Shanghai Gigafactory contributed to explosive revenue growth, and the stock price surged nearly 6 times in six months, from $350 to $2318. It then split 1-for-5, pushing the price higher to a peak of $1243. In just two years, Tesla’s stock price increased over 20 times, causing massive losses for short investors.

Unlike GME’s manipulation, Tesla’s short squeeze was driven by genuine fundamental improvements and valuation expansion in a global QE environment. The result was the same: a large number of short sellers were forced to cover, creating a positive feedback loop.

3. How Investors Can Respond

Facing short squeeze risks, short sellers need to assess the situation carefully, being brave enough to enter but also skilled at cutting losses.

Warning indicators to avoid short squeeze

Monitoring Short Interest Ratio When the short interest exceeds 50% of the float, a warning signal is lit. Even if the stock price remains weak in the short term, consider exiting early. Small gains or small losses are insignificant compared to massive losses from a short squeeze.

Applying RSI Indicator The Relative Strength Index (RSI) is an important tool to gauge buying and selling momentum:

• RSI > 80: Overbought, bullish strength
• RSI 50-80: Clear bullish advantage, unfavorable for shorting
• RSI 20-50: Balanced or bearish advantage
• RSI < 20: Oversold, high probability of reversal, should exit promptly to avoid a short squeeze

Strategies for Participating in Short Squeezes

If investors are confident and want to actively participate in short squeeze opportunities for profit, they must control the pace:

1. Monitor Short Positions Closely If short positions are increasing, indicating strong short squeeze momentum, consider adding to positions. Once short covering begins, exit immediately to lock in profits, as fundamentals often cannot support excessively high prices.

2. Understand the Nature of Short Squeezes Buying during a short squeeze is not based on confidence in the company’s prospects but to cover high-level short positions. Once the squeeze ends, prices tend to revert quickly to reasonable levels, with extreme volatility.

4. Long-term Survival Strategies for Short Selling

Choosing the Right Themes

Short squeezes typically require two conditions: excessively high short interest + intense market attention. To avoid becoming a target, investors should prioritize index or large-cap stocks. These assets, due to high liquidity, are difficult to accumulate massive short positions, making short squeezes highly unlikely.

Timing the Short Entry

In a bearish market environment, patience to wait for a rebound before shorting yields the best results. Also, avoid purely borrowing stocks to short, as this exposes you to forced buyback risks.

Hedging and Portfolio Balance

Investors can adopt a “dual-position” strategy to balance risk: simultaneously long individual stocks and short the market index. If the allocation ratio reaches 1:1, as long as the stocks outperform or decline less than the index, stable profits can be achieved, benefiting from relative performance regardless of market direction.

Conclusion

Short squeeze events are a double-edged sword for short sellers. Mastering the meaning of a short squeeze, understanding its formation mechanisms, and implementing proper risk control strategies are key to surviving and profiting in this zero-sum game. Remember: for short investors, staying alive and exiting is far more important than a single profit. The market will always present new opportunities, but once your capital is lost, it can never be recovered.