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.
In This Article...
The Volkswagen short squeeze: what led to it?
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 did the VW short squeeze turn out?
They don’t last with brief squeezes, as you are aware. It was predictable what would happen next. Within four days, the price of the shares dropped by 58%, and within a month, it had dropped by 70% from its October 28th peak. It was a traditional short squeeze pattern, according to Lindsey Bell, chief investment strategist at Ally Invest.
With any short squeeze, we observe a sharp price increase followed by a sharp decline in popularity. Additionally, when there is a squeeze, everyone attempts to sell at once.
However, all squeezes often end in the same way, with the stock often just returning to the point where its flight began. Most hedge funds were aware of this and kept their positions throughout the turbulence. They received significant compensation when the stock fell 70% in a single month as a result of this.
Minute Takeaway
- Porsche acquired so much Volkswagen shares in 2008 that it drove up the price of VW stock.
- A short squeeze is likely to occur in an actively shorted stock with a high short float and days to cover ratio.
- The price of a VW doubled in just two days. As a result, short sellers lost tens of billions of dollars over the course of a few days.
- The stock’s price decreased by 58% in four days.
- $30 billion was lost by hedge funds during the VW crisis.
- When hedge fund shorts on GameStop were squeezed, a similar phenomenon occurred. It ultimately cost them billions.
A Striking Similarity to GameStop
The 28th of January 2021 will go down in history as a significant day for the video game retailer GameStop. Prices in 2020 stayed in the $10 to $15 range. In 2021, prices increased by 400% in a single day to $483. For that, you can thank the WallStreetBets thread on Reddit.
Despite the firm’s substantial short interest, retail traders coordinated an attack on big money by raising the price of the shares. Indeed, GameStop’s price dropped quickly to the $40 area, following Volkswagen’s example. In a week, everything.
VW Short Squeeze Bottom Line
Some of the greatest short burns of the century were ones we witnessed. Although short selling is a fantastic technique to generate big gains, it is not for the inexperienced or weak-willed. This is due to the fact that a short sale has a lot of potential pitfalls.
Making sure you’ve done your homework is the most crucial thing you can do. You don’t want to end up on the wrong side of a trade because this kind of trading is a very tricky game. Allow us to assist you in your trading endeavors. To get you started, we provide thousands of dollars’ worth of free courses and videos.
What historical short squeeze is the biggest?
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.
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.
How long is a brief squeeze possible?
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.
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.
The duration of the VW brief squeeze.
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.
When in a short squeeze should you sell?
Understanding daily moving average charts, figuring out the short interest percentage, and short interest ratio are necessary for predicting a short squeeze.
Short interest percentage
The short interest percentagethe quantity of shorted shares divided by the total quantity of shares outstandingshould be considered as the first predictor. The short interest percentage, for instance, would be 10% if 20,000 of Company A’s 200,000 outstanding shares were sold by short sellers. More short sellers will be vying with one another to buy the stock back if its price starts to climb, therefore the greater this percentage, the more short selling there will be. (See What Short Interest Tells Us for additional information.)
Short interest ratio
The short interest ratio is calculated by dividing the short interest by the stock’s average daily trading volume (ADTV). For instance, it would take the short sellers five days to buy back their shares if you divided 200,000 shares of shorted stock by an ADTV of 40,000 shares.
The risk that short sellers will contribute to price inflation increases with the ratio. It may be a good idea to try trading a potential short squeeze at a short interest ratio of five or higher, which is a sign that short sellers might panic.
Daily moving average charts
The movement of a stock over a specified time period is displayed on daily moving average charts. A 50-day (or longer) moving average chart will demonstrate whether a stock’s price has experienced peaks. Check out one of the many charting software tools available to view moving average charts. These will enable you to plot this on the stock chart of your choice.
Keep abreast of developments in the industry that affects your stock because news headlines can potentially start a short squeeze.
Are short squeezes permitted?
The Securities and Exchange Commission claims that short selling is against the law.
“Short selling shares with the intention of bringing the price of the security down while failing to deliver shares at settlement. In general, this manipulative activity would be against Rule 10b-5 of the Exchange Act and other securities laws.
Is VW a buy?
From a financial standpoint, purchasing Volkswagen seems like a good deal. Volkswagen produced EPS of 37.24 in 2021 while trading at a price-to-earnings ratio of 5. The company also reported 296 billion in revenues, an increase of 12.3% year over year, and 45.2 billion in cash from operations. Volkswagen’s EBITDA margin varies between 18.5% and 5.5%, and its net income margin is roughly the same. Notably, Volkswagen made significant R&D investments in 2021, depreciating 16.1 billion and capitalizing an additional 10 billion in CAPEX. Volkswagen had 73.7 billion in cash and cash equivalents at the end of the fiscal year 2021, while it had 229.1 billion in total debt.
The future of Volkswagen seems promising. According to the majority of analysts, Volkswagen will reach the revenue milestone of $300 billion by 2023. However, it’s expected that EPS will remain below 2021 levels, at under 36/share.