What is the largest short squeeze in history?

A short squeeze is a situation where a heavily shorted stock or asset suddenly experiences a significant increase in price, causing short sellers to rush to buy it back in order to cover their positions and avoid further losses. This buying pressure can further drive up the price of the asset, leading to a "squeeze" on short sellers.

The biggest short squeezes in history occurred in January 2021, when shares of GameStop, a struggling video game retailer, suddenly soared in value following a coordinated effort by retail investors on the Reddit forum r/wallstreetbets to drive up the price. The short squeeze was fueled by a large number of short positions on GameStop, which had been taken out by hedge funds betting that the stock would decline in value.

As the price of GameStop began to rise, these hedge funds were forced to buy back their short positions at a higher price, resulting in significant losses. The short squeeze also had a ripple effect on other heavily shorted stocks, such as AMC Entertainment and BlackBerry, causing their prices to rise as well.

The GameStop short squeeze generated widespread attention and was described as a "David vs. Goliath" battle between retail investors and Wall Street. It also sparked a debate about the role of social media and online forums in financial markets, and led to calls for greater regulatory oversight.

Overall, the GameStop short squeeze was a dramatic and unprecedented event that had significant impacts on the financial markets and generated a great deal of discussion and analysis.

What about Volkswagen?!

Yes, people still talk about the Volkswagen short squeeze in 2008, but that only sent the stock price from €210 to €1,000. That’s big, but it’s only a 4x multiple. If you had timed the GameStop squeeze perfectly you could have made 28x your money.

Here’s what the GameStop chart looked like.

What happened with Volkswagen was a bit different. In 2008, Volkswagen (VW) was a heavily shorted stock due to concerns about the company's financial health and prospects for growth. However, in October of that year, a surprise announcement was made that Porsche, a luxury car manufacturer, had acquired a large stake in VW and was planning to increase its ownership to a controlling position.

This news caused a short squeeze in VW shares, as short sellers rushed to buy back their positions in order to avoid further losses. The price of VW shares soared, leading to significant losses for short sellers.

Using cash and derivatives, Porsche managed to acquire a 75% stake in Volkswagen. Another roughly 20% was owned by the German state of Lower Saxony. This only left about 5-6% of shares available on the open market for shorts sellers to cover with. Except 13% of the company was sold short so they were screwed. This caused what is now referred to as an infinity squeeze. It sent the share price vertical although not for long.

Porsche would later agree to sell up to 5% on the open market to return some liquidity to short sellers. They didn’t do this out of the goodness of their hearts. There were serious legal issues surrounding a private company sneakily accumulating so much of a public company. Don’t forget, institutions must file with the SEC soon after acquiring even 5% of a company.

Porsche agreeing to sell 5% caused the stock price to drop by 37%, and then sell off to 70% over the next weeks. So, if you ever get caught up in a short squeeze that isn’t based on fundamental values, don’t forget to sell before the bottom falls out.

In January 2010, several investment funds moved to press charges against Porsche, claiming market manipulation, but the chargers were later dismissed.

The Volkswagen short squeeze was significant because it highlighted the risks and potential consequences of short selling, and demonstrated the power of unexpected events to impact financial markets. It also sparked a debate about the role of hedge funds and other financial institutions in the short selling of stocks.

Think your stock is the next GameStop or Volkswagen? Check out these 10 signs of a potential short squeeze.

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