Short sellers profit when a price falls, so a rising price creates losses that grow as it rises. Closing that position means buying the shares back — and that buying can push the price up further, forcing more of them to do the same.
A short seller borrows shares, sells them immediately, and hopes to buy them back later at a lower price to return to the lender, keeping the difference.
The risk is not symmetric. A share you own cannot fall below zero, so a normal position has a floor. A share you are short has no ceiling, and losses grow without a natural limit as the price climbs.
Short interest is the number of shares currently sold short. It is often expressed as a percentage of shares available to trade.
A related figure is days to cover: short interest divided by average daily volume, an estimate of how long it would take short sellers to buy back their shares without overwhelming normal trading.
When the price rises, short sellers face growing losses and may be required to add collateral. Closing the position means buying — the same action as any other buyer.
That buying pushes the price higher, which pressures the remaining short sellers, who also buy. The mechanism is circular, which is why squeezes can be sharp and brief rather than gradual.
High short interest means many participants have taken a negative view. It is information about positioning, not a forecast, and it does not indicate when or whether anything will happen.
Short interest is also reported with a lag, so published figures describe the past rather than the present.
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From StockMotive — the honest why behind every market move. Educational information only, not investment advice.