James J. Hill, J. P. Morgan, and E. H. Harriman engaged in a power struggle over the Northern Pacific Railway in May 1901. By the close of business on May 7, 1901, the two parties held over 94% of the shares of Northern Pacific that were still in circulation. Third parties shorted Northern Pacific in a frenzied manner as a result of the subsequent runup in share price. On May 8, it became clear that NP shares that had not been committed would not be enough to cover the open short bets, and neither Hill/Morgan nor Harriman would be ready to sell. As NP “shorts” sold off holdings to obtain money to buy NP shares to fulfill their obligations, this caused a sell-off in the rest of the market. A truce between Hill/Morgan and Harriman helped to lessen the impact of the impending stock market meltdown, sometimes known as the Panic of 1901. [10]
Volkswagen AG’s stock on the Xetra DAX rose from 210.85 to over 1000 in less than two days in October 2008 as a result of a short squeeze brought on by a Porsche takeover attempt, briefly making it the most valuable corporation in the world.
[11]
[12] A Stuttgart court cleared former Porsche CEO Wendelin Wiedeking of the charge of market manipulation. [13] [14]
In connection with a short squeeze on a number of high-yield bonds issued by MAAX Holdings, the U.S. Securities and Exchange Commission charged Philip Falcone with market manipulation in 2012. Falcone bought the whole bond issue after learning that a company was shorting the bonds. He also extended a loan to the short-sellers of the bonds, and upon their sale, he later purchased them back. Because of this, his overall exposure was greater than the value of the entire MAAX bond offering. Falcone immediately stopped lending the bonds, making it impossible for short-sellers to cover their bets. The bonds’ cost increased sharply. [15] [16] The only way for the short-sellers to close out their bets was by speaking with Falcone directly. [16]
In November 2015, bankrupt biotech KaloBios (KBIO) experienced a short squeeze that increased the share price by 10,000% in just five trading days. Short sellers had viewed KBIO as a “no-brainer near-term zero.” [17]
Beginning in January 2021, there was a short squeeze on GameStop shares[18][19] that was mostly caused by the Reddit site WallStreetBets.
[20]
[21] Due to this pressure, the share price on the NYSE rose to an all-time intraday high of US$483 on January 28, 2021. [22] [23] Numerous news outlets and social media sites covered this squeeze. [24]
In This Article...
How many days are there in a short squeeze?
Once the short squeeze has started, you can trade on it using our derivative products on our Next-Generation trading platform, including spread bets and CFDs. With derivatives, you merely speculate on the underlying share’s price swings rather than really owning it. Unlike leveraged products, which allow traders to place a small deposit of the full value and receive full exposure to the market, traditional share trading requires you to buy and assume ownership of the stock. Keep in mind that trading on leverage carries a significant risk, and losses can quickly outpace gains.
You should look at the short interest ratio of a security to discover if it is extensively shorted. Various websites offer this kind of information, and a short interest of above 20% signals that it is favorable to stock shorts and may soon result in a short squeeze.
If they can anticipate market moves and open reactive buy and sell positions, retail traders can profit from a short squeeze. Another way to put it is that the company whose stock is being shorted might gain since investor interest raises the share price. It can be extremely harmful and result in significant losses for institutional traders and hedge funds that have a significant amount of cash invested in a stock, as was the case with the GameStop [GME] short squeeze.
A short squeeze may last a few days or several months, depending on how much stock was shorted. This can be calculated, for example, by dividing the average daily trading volume of a company by the short interest ratio of its shorted stocks. This offers you an estimate of how many days it might take sellers to cover their short positions, however it might be less time if the squeeze is more aggressive than initially thought.
How much time was Volkswagen deprived?
In the same month thirteen years ago, the Frankfurt-listed shares of Volkswagen increased by more than four times in only two days, briefly elevating the German automaker to the position of most valuable firm on the planet.
In the four days following the stock’s peak on October 28, 2008, it fell 58%, and by September of that same year, the shares had fallen 70% from their peak, giving up the majority of the squeeze.
Even though the Volkswagen short squeeze occurred more than ten years ago, day traders might still benefit greatly from this particular stock market incident.
Let’s examine the meanings of “short selling” and “short squeeze” before delving into the 2008 VW short squeeze.
What was the peak of the VW stock during the squeeze?
With a share price of over 1000 in October 2008, Volkswagen briefly held the title of most valuable corporation in the world. And it all began with a shocking declaration by competing automaker Porsche.
What happened?
Volkswagen and Porsche have a long history of collaboration, and Porsche has constantly had a small interest in Volkswagen. However, Porsche disclosed on October 26, 2008, that it had acquired control of 74% of Volkswagen’s voting shares by purchasing nearly all of the company’s outstanding shares.
Of fact, the global financial crisis had already taken hold by October 2008, and short selling was rife. Only because so much Volkswagen stock (about 12.5%) was lent to short sellers at the time of the Porsche announcement was the Volkswagen short squeeze enabled. These short sellers rushed to close out their positions when the market opened the next day in an effort to limit their losses, which resulted in the purchase of more stock and an increase in the share price.
Volkswagen’s stock rose about 150% on October 27 from its opening price of 348 to its closing price of 517. By Tuesday, the stock had reached its all-time high of $999 per share, with short-selling losses pegged at tens of billions of dollars. Wendelin Wiedeking, the CEO of Porsche, was eventually prosecuted with market manipulation for his involvement in the short squeeze, but the accusations were later dropped.
Volkswagen’s brief squeeze began when?
In 2008, when Porsche launched an unanticipated sequence of operations that resulted in it controlling a sizeable portion of Volkswagen’s (VW) stock, the largest short squeeze in history occurred. VW momentarily became the most valuable publicly traded corporation in the world as a result.
What was the world’s biggest short squeeze ever?
Volkswagen shares saw the largest short squeeze in history in 2008. The automaker’s prospects first appeared bleak, but when Porsche announced a majority ownership, the situation abruptly changed. The share price spiked as short sellers rushed to close out their holdings, making VW temporarily the largest business in the world.
How high can you squeeze a short one?
If you short a stock at $10, it cannot go below zero, thus your profit on the deal is limited to $10 per share. However, there is no cap on the stock. You can be required to buy it back at $20, $200, or $2 million after selling it for $10. A stock’s potential height is unbounded theoretically.
How long was the pressure for VW?
By Sunday, October 26, word had spread that there were fewer than 6% of VW voting shares still on the market. Short sellers started to panic, and the massive short squeeze caused by the mismatch in supply and demand caused its share price to increase from 210.85 to more than 1,000 in less than two days.
What was the Volkswagen short squeeze percentage?
Volkswagen, the German automaker, experienced a brief squeeze at the hands of its trading partner, Porsche, during the 2008 global financial crisis. The aftermath of the US economic disaster and the fall of Lehman Brothers had already sent markets all over the world into a tailspin.
When Porsche revealed its intention to grow its stake in the firm in 2006, the price of Volkswagen’s stock steadily began to rise. Even in 2007, when the company was in financial trouble and had accrued a lot of debt, the stock price was still rising.
The start of the financial crisis in 2008, which wiped off demand for the company’s cars, made things worse. Due to the impending collapse of the corporation and its inflated value on the stock market, this prompted numerous hedge funds to initiate short positions in the stock.
In March 2008, there were market rumors that Porsche was considering increasing its current 31% holding in Volkswagen to 75%. Porsche originally rejected the rumors, but on October 26th, 2008, the firm revealed that it had in fact expanded its holdings in Volkswagen to 74.1% (42.6% of Volkswagen’s common shares and 31.5% cash-settled options on Volkswagen’s common shares).
Around 94% of the company’s shares were essentially out of the market thanks to the German state of Lower Saxony’s additional 20% ownership. This indicated that only 6% of the company’s shares were freely floatable on the market.
Porsche’s announcement that it had no plans to buy Volkswagen outright also served as a warning to the market that there were more short positions on Volkswagen’s stock than had been anticipated. The short sellers scrambled to close their bets as the news shocked them.
With only 6% of the company’s shares accessible for trading on the Frankfurt Stock Exchange, it was estimated that about 12% of its outstanding shares were sold short, making it hard to liquidate them. Market panic set in when short sellers were left in the dark by the imbalance in supply and demand.
How long did the short squeeze at Gamestop last?
There are hundreds of short squeezes per year on average, with more during periods of market turbulence, but the GameStop squeeze stands out due to its length and the apparent lack of significant positive newsflow from the company.
Length
We didn’t anticipate the GameStop short squeeze to continue for as long as it has. The greatest price surges frequently occur overnight during the regular one- to two-day short squeeze. Since at least two weeks ago, if not more, GameStop has been generally rising with some significant swings throughout trading hours. The fact that the regulators’ and brokers’ interventions are so out of the ordinary may be what’s fueling that.
Newsflow
Second, short squeezes are typically a response to a good news story. A brief squeeze frequently requires additional components as well, although a good news release frequently comes first.
Naturally, GameStop did reveal information about holiday trading and a board shuffle on Monday, January 11, but the stock essentially traded flat the following day. The stock didn’t start to increase significantly until Wednesday, January 13. It persisted for the next two weeks without any apparent update from the company. That is strange.
What was the 2008 VW short interest?
Rewind to 2006 when Porsche announced unexpectedly that it wished to grow its stake in VW. To do this, they made massive investments and bought a ton of VW stock. Naturally, the stock price began to increase consistently over time.
What should one do in this circumstance? In fact, the hedge funds did just thatthey shorted it to death. Hedge funds were keeping an eye on the stock and decided it was significantly overvalued, so they started shorting it in the hopes that it would eventually fall.
Short positions exploded towards the end of 2008. The shocking fact was that Porsche owned 43.3% of VW shares, 32.2% of VW options, and 20.2% of VW stock. As you can see, there was not much left that anyone else could buy.
Simply put, it meant that the actual available float decreased from 45% of the whole number of existing shares to just 1% of the total number of outstanding shares. Furthermore, the 12.8% short interest that appeared to be “modest” actually resulted in a severe supply and demand imbalance. Thus, despite the fact that there were simply no shares available for sale, millions of shares needed to be purchased right away.
The Fallout of the VW Short Squeeze
According to Porsche, they “decided to make this notification after it became apparent that there are by far more short positions in the market than anticipated.
Even with its disarming wording, Porsche’s announcement had the exact impact we anticipated. Indeed, the statement caused everyone who was short VW shares to run for the exit in a panic. Additionally, Porsche had released this information on a Sunday, a day with no trading. Not surprising at all. As a result, until the market reopened, short-sellers would be unable to cover their holdings.
Due to this discrepancy, short sellers scrambled to acquire additional shares to cover their bets, pushing up the stock price even further until October 2008it is currently sitting slightly above 900 and once went beyond 1,000 in intraday trading.
In the end, Porsche made billions while hedge funds that had been shorting VW lost close to $30 billion. Ironically, this occurred at a time when the industry’s car sales were performing incredibly poorly.