What is a Long Squeeze?

Bull

Pretty much everyone has heard of a short squeeze. The event is when something unexpected happens that causes shorts to be ‘squeezed’ out of their position and forced to cover. Short squeezes can cause a lot of short pain and be breathe-taking both in their magnitude and in the speed that they appear and disappear. Short squeezes might include a ‘forced’ element to it, where some shorts are forced to cover to meet margin calls if the stock that they are shorting goes up too much.

What a Long Squeeze Is

Very few investors have heard of a long squeeze, however. As it stands, a long squeeze is the opposite of a short squeeze. It’s when something happens that causes longs to sell their positions in a falling stock, causing further drops. A long squeeze occurs mainly in stocks with comparatively low liquidity versus a seller’s long position. The long sells his position to protect against further loss. There may also be an element of ‘forced’ selling involved. If a stock drops a lot, bullish traders on margin may be forced to sell some of their positions to make up for the margin.

Events that cause a Long Squeeze

Some events that could cause a long squeeze include very bad earnings reports that cause investors to doubt the future viability of a company. They could also include short reports that indicate 100% fraud in a company. In bear markets, bad news could cause already panicky longs to sell even if the fundamentals of a company don’t necessarily warrant the major decline.

The Takeaway

Both long squeezes and short squeezes offer opportunities for traders who know how to play them. Due to the forced nature of the squeezes, stocks undergoing short squeezes and long squeezes may show strong momentum for a period of time that could be profitable. Both are also difficult for beginners because prices around the stocks could swing quickly one direction or another with no warning.

That being said, it is often difficult to tell the difference between a long squeeze and a stock that legitimately deserves to be sold due to fundamentals. An investor should do his research, position size correctly, use fundamentals, and technicals, and have experience before playing long squeezes.

Read more helpful articles at The Complete Guide to The Short Squeeze: An Educational Article List.

Disclosure: no positions