Infinity short squeeze is a very important phenomenon in stock trading. Why is it important to know about it? Let me ask a question to make things clear. Suppose you are a short-seller and looking to short-sell stocks of a company. What are you expecting? You are expecting to buy at a lower price to return borrowed stocks to your broker. But wait, what if the stock price doesn’t fall as you had hoped? Instead, stock prices continue to rise higher and higher. Now the question is – can you imagine the losses you would incur?
Obviously, you would incur huge losses, especially if you had played big. Yes, this is an infinity short squeeze when the stock price continues to rise higher and higher after a short squeeze. Therefore, it is important to know all about it. Given the importance of this phenomenon, we are going to help you. In this article, you are going to learn what is infinity short squeeze and what are the risks associated with it.
Infinity short squeeze – definition
An infinity short squeeze refers to a scenario where the stock price continues to rise higher and higher after a short squeeze. Although it is not possible for stock prices to rise to infinity, still prices go very high and cause significant losses to short-sellers. Moreover, heavy shorting of a company’s stock followed by heavy interest from another party causes an infinity short squeeze.
What are the risks?
What are the risks associated with an infinity short squeeze? It is very important to understand the answer to this question. As we have discussed earlier, it is technically not possible for the price of an asset to rise to infinity. However, it is possible that stock prices may rise very high and cause huge losses. How an infinity short squeeze may affect short-sellers? Let us try to understand through an example.
Volkswagen was a bankruptcy candidate during the financial crisis of 2008. The company was struggling financially even before the crisis. It was very obvious that the demand for luxury vehicles would significantly decrease in the midst of the crisis. So, short-sellers deemed it a perfect opportunity to capitalize on. They began to short-sell Volkswagen stocks. The scheme was to buy back stocks at a significantly lower price.
However, there was another player involved in the situation. It was Porsche and it already had a stake in Volkswagen. In 2008, they acquired more stocks and took their stake to 30% with an option to buy 44% more shares. Lower Saxony also owned 20% shares of Volkswagen. Short-sellers began to short Volkswagen stocks hoping that Porsche would never take the risk to take over a bankrupt candidate. It was a valid point but still, anticipation and anticipation may go wrong. And that’s what happened with short-sellers.
Porsche acquired more shares and took their total stakes to above 70%. 20% of shares were already owned by Lower Saxony. So, short-sellers had to buy stocks to close their positions but there were no stocks available to be bought. As a result of this supply and demand imbalance, Volkswagen stock skyrocketed to above €1,000. Thus, a struggling automaker rose from bankruptcy candidate to one of the most valued companies in the world.
So, Volkswagen was the gainer but who was at the wrong end of the spectrum? Yes, they were short-sellers. The infinity short squeeze hit them very hard. These are the risks of infinity short squeeze. If someone gets caught by it, it is nearly impossible to recover again. Therefore, if you are a short-seller, stay vigilant and informed before making a shorting decision.