That's how the short squeeze accelerates.Fellow VW Group manufacturer Porsche is investing heavily in synthetic fuels and establishing an e-fuel production facility in Chile through a partnership with Siemens. When sellers aren't readily available, they'll have to pay through the nose to entice them. Yet to do so, they each have to find available shares they can buy and return to Annie and Chris, respectively. When GameStop's share price goes up, both Bob and Diane are under pressure to cover their positions.
Given this ability to multiply the number of available shares into massive short positions, a short squeeze could have a cascade effect.
INTEREST SYN PLUS
When you add together the actual shares plus these "synthetic" positions in the stock, the short interest can't exceed 100% of that larger total. They have the right to get back the shares they lent at any time. But part of the answer lies in the fact that there are investors that don't currently possess actual shares of GameStop but who have the same economic interest as shareholders. This still might seem impossible, and in a sense, it is. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%. The short interest volume these transactions add to the total is twice the number of shares actually involved. In this example, the same shares end up getting borrowed and sold twice. Diane, another GameStop bear, can borrow those shares and sell them short. More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. To Chris, they're just like any other shares.
However, Chris has no way of knowing that those shares have been borrowed from Annie. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall.Īn investor named Chris ends up buying those borrowed shares from Bob. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. The reason has to do with the nature of the short-sale transaction itself.Īs an example, take a situation involving four investors. However, even without a naked short sale, it's theoretically possible for short interest to exceed 100%. This can lead to market disruptions, and while there are some exceptions to the regulations, most brokers stop regular retail customers from selling stock short if they can't obtain shares to borrow. With a naked short sale, the broker allows the customer to do a short-sale transaction without actually arranging to borrow the shares beforehand. Securities and Exchange Commission regulations designed to prevent what's known as "naked" short selling. Once all the shares have been borrowed, you might think there wouldn't be any more for short-sellers to get. Round and round shares goĪt first glance, it might seem like you could never have more than 100% of a company's shares sold short. If shares just aren't available, the broker generally has the right to close your short position automatically. Ordinarily, your broker will find other shares that you can borrow in their place. The investor who loans you the shares has the right to get them back at any time with little notice. If it's hard for your broker to find shares that you can borrow, you may end up having to pay a borrowing charge to get the stock to sell short. That sounds simple, but there are some facts to remember.
If you want to sell a stock short, here's a simple guide to the process:
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