What is a short squeeze?

A short squeeze happens when short sellers rush to close positions on a stock with heavy short interest by buying shares, fueling a rapid price surge. To avoid a short squeeze:

  • Avoid shorting stocks with very high short interest, as a squeeze is more likely.
  • Use stop-loss orders to cap losses if the price starts rising significantly. This limits how much you lose in a short squeeze.
  • Don't concentrate your portfolio in just a few short positions. Diversify across stocks and sectors to reduce risk.
  • Monitor daily changes in short interest. A big drop could indicate short sellers are covering positions, signaling higher squeeze risk.
  • Stay on top of news and events that could drive prices up and spark a rush of short covering. Be ready to close positions quickly if needed.
  • Consider buying put options as an alternative. They cap your losses if a squeeze occurs. You can still profit from price drops without uncapped loss exposure.