Basics of Short Selling and Short Squeezes
First, let’s clarify short selling and what the “mother of all short squeezes” means. Short selling occurs when investors borrow a stock and sell it immediately, hoping to buy it back later at a lower price. If the stock price increases, however, short sellers are required to repurchase the stock at a higher price, resulting in losses. In short selling, the maximum profit is achieved when stock prices fall to zero, but potential losses can be infinite because stocks can theoretically rise indefinitely.
A short squeeze happens when a stock’s price unexpectedly surges, forcing short sellers to buy back their positions, driving the stock price even higher—creating a cycle of rapid price increases. A short squeeze is more likely to happen when the market has a high level of short interest. The longer the short interest as a percentage of the float, the higher the risk that “crowded” trades can go wrong and result in fast-moving squeezes, especially for those who wrote naked calls.
What is the Mother of All Short Squeezes
The “mother of all short squeezes” (MOASS) is a more extreme version of a typical short squeeze. A short squeeze occurs when there is a significant gap between the amount of shares available to buy (“float”) and the actual outstanding short positions. In this case, 40% or even 50% of the float may be involved in short positions. In the GameStop squeeze earlier this year, the short interest reached 140%, exceeding the available float when borrowed shares were compared to the overall share count.
There are usually a few catalysts for the mother of all short squeezes: First, positive news or strong earnings results can give well-reasoned investors confidence in a company, triggering a stock price surge. For example, better-than-expected quarterly results may turn an unrelated headline into a price-driving event. Second, sudden shifts in market sentiment can exaggerate stock price swings, especially if retail investors flood in. Social media groups—such as Reddit’s WallStreetBets, which played a central role in the GameStop event—can act as mini-armies of retail investors. As the price rises, short sellers are forced to buy back even faster, leading to a stronger upward spiral.
In these cases, stock prices can multiply by ten, or even a hundred times. GameStop’s stock rose from below $20 to nearly $500, an increase of over 2,500% in just a few weeks. This irrational rally caused billions in losses for short sellers and drew attention from the global investment community.
Market Volatility Impact
The mother of all short squeezes has a profound impact on the market, investors, and regulators. First, volatility rises dramatically. During the GameStop event, the volatility index (VIX) jumped to 37.21, indicating the market’s extreme anxiety about an uncertain future. Second, short squeezes can cause stock prices to rise in absurd ways. During one week of the GameStop squeeze, the stock’s average daily gain was over 100%, a nearly unprecedented phenomenon in financial market history.
Short squeezes can cause significant financial damage to hedge funds and other large short-selling institutions. Melvin Capital, for example, lost 53% due to its short position in GameStop, amounting to billions of dollars and ultimately requiring an external bailout. Similar situations occurred during the Volkswagen squeeze, where some large hedge funds lost nearly €1 billion. High risk and high reward often coexist, and short squeeze events can become financial disasters.
Regulation and Market Impact
The mother of all short squeezes also attracts regulatory attention. Short squeezes can create market chaos, bubbles, and distortions in market functioning if transparency is insufficient. After the GameStop incident, the U.S. Securities and Exchange Commission (SEC) held several hearings to discuss the role of social media in market manipulation, the legality of short selling, and potential breaches of securities laws. At the same time, trading platforms like Robinhood faced criticism for restricting retail investors from buying certain stocks.
Regulatory intervention aims not only to control market volatility but also to balance market openness with risk management for investors. The ultimate short squeeze serves as a stark reminder to investors that markets can behave unpredictably, and the complexity and uncertainty of financial markets continually challenge human expectations.
