A hedge fund or trader may decide to short the stock if they think the shares of a company are overpriced. As was already mentioned, a trader who is shorting a stock does not actually own the shares; rather, he is committing to return them to his broker at a later time.
As a result, he purchases the shares on credit and then sells them. He buys them again at the reduced price and returns them when the price drops.
Volkswagen’s price did not fall, but hedge funds and other short-sellers were forced to acquire shares at a loss in order to uphold their agreement. Short sellers are thought to have lost approximately 30 billion ($38.33 billion) as a result of the VW short squeeze.
In This Article...
What size was VW stock at the time of 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.
What has ever been the biggest short squeeze?
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.
When was VW under pressure?
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.
How long did the peak of VW squeezing last?
After VW’s stock price peaked on the 28th, the short squeeze somewhat eased, and the stock fell by 58 percent in just four days. A month later, it had fallen by 70 percent from its peak.
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 might 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.
What penny stock has ever been the most profitable?
A penny stock can occasionally grow into a billion-dollar business. But it’s uncommon. Studying how something occurred is the best thing we can do after the fact.
True Religion (formerly NASDAQ: TRLG)
This shady jeans firm stock became a legitimate stock, just like Pinochio! It was bought by private equity firm TowerBrook Capital Partners in 2013 for $32 per share.
Eventually, its exponential growth stopped. In the years since, the company has twice filed for bankruptcy.
Pier 1 (formerly NYSE: PIR, now OTCPK: PIRRQ)
Few equities have experienced such incredible highs as Pier 1 and then managed to turn around their fortunes!
A network of stores called Pier 1 specialized on home goods. It made a bankruptcy declaration in February 2020.
What stock gained the most in value in a single day?
With a rise of 2,112.98 points on March 24, 2020, the Dow Jones Industrial Average (DJIA) experienced its greatest single-day increase in history. This happened around two weeks after the biggest one-day point loss, which took place on March 9, 2020 and was brought on by the mounting concern about the global coronavirus outbreak.
30 major firms that are traded on the New York Stock Exchange make up the DJIA index. Financial analysts regularly monitor this figure, viewing it as a leading indicator for the US economy. Knowing when these significant gains and losses take place can provide light on the potential causes of these oscillations. Those in 2018 are definitely indications of increased market volatility, whilst those in 2009 are probably adjustments following significant losses during the Financial Crisis.
Even though the DJIA is frequently watched, it only provides information on the performance of thirty of the biggest American corporations. An index like the S&P 500, which tracks 500 companies, can provide a more thorough picture of the American economy. This merely represents investment, though. Consumer spending and the unemployment rate, for example, are not adequately represented in stock market indices.
How much time did GameStop need to squeeze?
The shares of GameStop, an American retailer of video games and gaming accessories, closed at less than $20 per share on January 12, 2021. A series of short squeezes that happened over the course of around 10 trading days caused the stock price to increase by more than 15 times, reaching a high of $500. Similar behavior was observed in the movie theater company AMC Entertainment, where shares increased by 300% on January 27, 2021, finishing at $19.88. At this point, members of the Reddit subgroup Wall Street Bets started purchasing shares.
Short-sellers fell into the trap of a short squeeze as a result of the unheard-of surge in these equities. These erratic price changes were not caused by fundamental variables or company-related news. In order to sustain their pessimistic investment, investors had borrowed money. In the end, they had to choose between losing their money to additional losses or repaying it by purchasing these shares at higher prices.
What caused the VW squeeze?
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, failed 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]
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.
By late 2008, short positions soared. 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.
Are short squeezes permitted?
Stock close-out purchases won’t always result in price increases for those equities. Clean up open fail positions, but don’t create short squeezes, is one of Regulation SHO’s main goals. Short sellers who are under pressure to cover their positions as a consequence of sudden price increases or challenges borrowing the security they are short are referred to as being in a “short squeeze.” The rush by short sellers to close their positions results in extra upward pressure on the stock price, which can lead to an even tighter squeeze. Although certain short squeezes may happen on the market organically, it is prohibited to utilize a plan to manipulate the price or supply of stock in order to create a short squeeze.