mav600 ([info]mav600) wrote,
@ 2008-07-26 10:47:00
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Investing help needed
What is a short squeeze and how significant could it be?

From what I understand it is that alot of people are short and if they all try to cover the price is going to jump up.

I own 157 shares of siri bought at $3.50

I own 3 contracts of sept $3 calls that I bought for .25/share

I have lost about $230 on expired sirius calls.

Im trying to figure out what to do on monday. I have read on message boards that about 11% of sirius shares outstanding are short and this short squeeze is going to happen and cause the stock to jump all week as people cover their shorts. This is because the merger was officially approved.

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[info]gunga_galunga
2008-07-26 03:59 pm UTC (link)
A short squeez is when a lot of people have shorted a stock, but the stock goes up. If this happens and the shorts don't have enough capital they are forced to cover, which means they have to buy the stock which drives the price up further forcing other shorts to cover thus forcing the price up further. A cycle can happen where a lot of the shorts have to cover in a short period of time. This was happening a lot in the late 90s when a lot of people were correctly assessing that Internet stocks were over valued but enough people were irrationally exhuberant and still buying which drove up prices and squeezed the shorts out of the market. The challenge with shorting stock is you. Not only need to be right your timing needs to be right too.

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[info]prock
2008-07-26 04:21 pm UTC (link)
Just a minor correction, your timing doesn't need to be precise if you are properly capitalized. Timing is more of an issue with options.

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[info]corey_m
2008-07-26 06:43 pm UTC (link)
http://finance.yahoo.com/q/ks?s=SIRI

About 11% of the shares are short which represents about 5 days of average trading volume. I don't think that a short squeeze is likely, but there may be some short covering if the shorts decide that the stock is undervalued. Betting against the shorts in the long run is usually dumb money though because they are the most sophisticated and informed investors.

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