Short squeeze 101

[manuelbean]

Hi everyone, I'm new to short squeezes and I hope someone can help me out.

 

Without a Bloomberg Terminal, how can an investor know the number of shares that are being shorted (in real time)?

How does one know when shorts are covering (other than by the rise in share price) and how many shorts are actually covering?

 

Does anyone have good resources on this?

 

Thank you all

[Gregmal]

To my knowledge there is not anything that tracks real time(like to the minute) figures. The above is an art more than a science, but a bit of both at the same time.

 

Some helpful things to observe that facilitate the ability to wager with confidence when the deck is stacked so to speak...

 

1. Borrow rates. There is a very high correlation with rising borrow rates and short squeezes. The reason is common sense. If your cost to carry rises from 1% a month to 5% a month...the trade becomes more expensive and less desirable and the experienced short seller also becomes aware of the risk others beat you to the punch in terms of deciding to cover.

 

2. Borrow availability. This is not as useful because many times shares are just tightly held or held in type 1 accounts. But HTB stocks are almost always the more likely to get squeezed compared to a GC stock.

 

3. Margin calls. Many times, a 10-20% move is really just the catalyst itself as it triggers losses and house rules that propel others to change their bets.

 

4. Forced buy ins. This is a big one and usually combines 1-2. When the rates rise and there's no more borrow, short sellers typically have 24 hours notice to either find a new locate or be bought in. This, from the firms I follow, typically occurs between 2-3 in the afternoon. Sometimes an hour earlier but always second half of the day and never after 3. Even just the notice of a potential buy-in creates panic and many times people will just immediately cover.

 

5. Option activity. As was touched on a while ago with the AAPL rally, options, specifically calls, force the market makers to going into the market and hedge.

 

6. Less frequent and harder to follow but some of the biggest short squeezes Ive followed have resulted from an out of the blue announcement that indicates even less stock is available than previously thought. Keeping tabs on tightly held companies with high short interest in the easiest way to track these developments.

 

So you'll never "know" exactly when someone is covering, but if you follow the signs, you can get pretty damn close to predicting when something is brewing.

[manuelbean]

Thank you very much for your answer. I'll digest it slowly given that I'm new to this.

 

I was looking at Dillard's example and I was trying to understand this chart:

https://iborrowdesk.com/report/DDS

 

Does this mean that there are only a few thousand shares that are available for borrowing?

 

I would say that the fewer shares available for borrowing, the higher the cost of borrowing, right? But by looking at the chart, it doesn't seem exactly correlated.

 

What makes the price go up and down?

 

 

 

 

[Gregmal]

Yea I'd imagine that is collected data from a sweep of the GTB reports from major brokers.

 

The relationship is not always that simple, but largely the rate is supply/demand driven. But a rate going up doesnt necessarily mean more people want to short. It could simply mean that x amount of shares already being borrowed have been sold. Thus forcing existing short sellers to either find new locates or cover. It could also be gamesmanship. Eddy Lampert was rumored to regularly switch his shares from marginable to nonmarginable to squeeze shorts. This is the exact tactic that Martin Skreli used with whatever that bankrupt penny stock he pumped was, to cause a whole lot of carnage, including the dude who ended up having to do a GoFundMe account after getting squeezed into a massive margin debt.

 

Yesterday with DDS, I did notice the borrow rate dropped. That, and the follow through today, along with the benefit of hind site, may indicate that at least for the near term, the 52-61 early morning spike was your big short squeeze.

 

 

[manuelbean]

Thank you very much for your help Gregmal.

 

I'll be reading your comments slowly over the coming days so I can learn.

 

Do you know of any bibliography I can read about short squeezes?

 

Thank you

[Gregmal]

Theres not many truly good books on the mechanics of short selling, but there are some with decent case studies.

 

The most effective process Ive found, is actually engaging in short selling, which is truly a difficult, time consuming, and energy intensive exercise. But it really gives you the ability to understand everything from managing entries/exits, tracking down shares, hedging, avoiding unnecessary costs, and other important aspects that when long, you are able to identify. Such as what anyone who is short a stock like DDS is thinking and feeling over the weekend after seeing that filing. Which would lead you to have been leaning towards a short squeeze occurring very early in the day Monday. Or what's the standard operating procedure when borrow costs seem to be climbing 20% a day. Or what the first instinct is when you get that dreaded email from the broker saying "BUY-IN"...

[D33pV4lue]

 

Does this mean that there are only a few thousand shares that are available for borrowing?

 

I would say that the fewer shares available for borrowing, the higher the cost of borrowing, right? But by looking at the chart, it doesn't seem exactly correlated.

 

What makes the price go up and down?

 

Currently I show 18,500 shares available to be borrowed @ -78.891. The answer to your question about borrowing vs cost revolves around a few things. When shares are sold short they are borrowed from the brokers inventory or clients that hold the shares in margin (availability pool). Availability could down because it is A) heavily shorted B) not a large amount of shares in margin or inventory. Borrow costs usually rise on heavily shorted stocks not becayse lack of availability.  Example we had a buy-in notification 2 weeks ago the cost never rose and the shares were raised before the execution date so no action was needed.  A large holder is incentivized to hold the stock in cash so that the shares can't be lent out. See if your custodian offers a Short Rebate Report which you can review weekly to see if costs are rising/falling. Personally i hate short selling, the need to worry about buy-in, unlimited potential lost, and dividend charges/borrow cost are all headwinds that make short selling difficult. if you are new to it i would suggest you just stay away, but thats my own personal opinion. If you do decide to keep at it avoid valuation shorts and look for broken businesses.  BOL

[manuelbean]

Thank you very much for your answers guys.

 

I'm not really into shorting, I just wanted to learn about short squeezes (maybe to benefit from them in the future), but it seems that there is much lingo that I don't understand, many operations that I wasn't aware of, much information that isn't easily accessible and (according to you guys) a lot of practice needed.

 

I'll just google it so I can learn the basics so I can have a conversation with you guys  ;)