GameStop’s short squeeze has been all over the media this week, which is why I thought it’d be beneficial for me to show you how you can profit from a short squeeze.
Traders who short stocks (and there are a ton of them) have to borrow shares, right? You can’t sell something you don’t own.
So these traders have to make sure their broker has the shares available for borrowing. And if they’re available, then the trader must sell them and then buy them back at a lower price in order to pocket the difference.
It’s a little confusing, so let me give you a quick rundown on how to profit from a short squeeze…
How to Profit From a Short Squeeze
Let’s say ABC stock is trading at $5 per share and I think it’s going to trade down to $1 per share.
So what I’d do is call my broker to find out if they have those shares and if they’d let me borrow them. They’ll obviously charge me interest in addition to the going rate, but I’ll take those shares and then sell them on the stock market for $5 per share (the current market price).
And assuming the price of the stock goes down to $1, I’d go back to the market and buy the same number of shares for $1 per share, and then give them back to my broker. My broker has his shares back, and I make a $4 profit per share (the difference between what I sold them for and bought them back for).
No harm no foul, right?
But sometimes the trade goes the other way. The stock rises and short sellers are forced to cover at a loss, injecting more buying power into the security.
That’s what we like to call a short squeeze.
So how can you profit from a short squeeze? Check out my short video below and I’ll show you my absolute favorite way to profit from a short squeeze, along with three stocks that you could trade to potentially profit from the downside.
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P.S. Check out Alpha Trades Head Strategist Adam Sarhan’s short video on the real reason why brokers like Robinhood, TD Ameritrade, Charles Schwab and others are restricting or outright banning new trades on GameStop, AMC, BlackBerry, American Airlines, Bed Bath & Beyond, Nokia and others.
Did you lose money or miss out on any big wins because of the restrictions? Are you considering changing brokers now? Share your thoughts on the ongoing short squeeze mania with us at email@example.com, and we could feature your story in an upcoming piece.