What does "嘎空" mean? Understanding the risks and strategies of short squeeze markets

When market volatility is intense, many investors start engaging in short-selling strategies. While shorting may seem like a quick way to profit, it carries extremely high risks. Besides fundamental improvements causing significant losses, there is an even more dangerous risk — a short squeeze.

1. Understand Short Selling First, Then What Is a Short Squeeze

Before discussing a short squeeze, you must grasp the concept of short selling. Short selling is a reverse investment strategy: when you expect a stock or asset to decline, you sell (borrow if you don’t own it), and then buy back at a lower price to profit from the difference.

There are three ways to implement short selling:

1. Borrow Stocks to Sell
Borrow stocks from long-term shareholders and pay interest. After selling, wait for the stock price to fall, then buy back to return to the original shareholder.

2. Futures Trading
Shorting by paying margin, but requires rolling over at expiration. If the stock price rises, you may face margin calls or forced liquidation.

3. CFD (Contract for Difference)
Requires margin but no need to roll over. The risk is the same — if the stock price rises, you may be forcibly liquidated.

2. What Exactly Is a Short Squeeze (Gao Kong)

Gao Kong (Short Squeeze), also called “軋空,” means forced covering of short positions. Specifically, when the price of a stock or asset being shorted surges excessively, short investors are forced to buy back their positions at high prices to close their positions. This forced covering further drives up the asset’s price.

Short squeezes can be categorized into two scenarios: one is a rapid rebound in stock price, forcing shorts to sell at a loss; the other is a group with capital deliberately inflating the stock price, forcing short sellers to cover at high prices, from which the group profits immensely.

Why does a short squeeze occur? When the short interest in a stock exceeds 50% of the circulating shares, it becomes a target for market attack. Market participants realize that by collectively buying, they can force a large number of short sellers to cover, pushing the stock price higher.

3. Historical Cases: How Short Squeezes Destroy Short Sellers

GME vs. Wall Street

GME is a game console retailer suffering years of losses due to industry decline. In September 2020, Canadian entrepreneur Ryan Cohen heavily bought shares and joined the board, prompting the stock to rise from single digits to nearly $20.

Wall Street quickly issued reports claiming the stock was severely overvalued and recommended shorting. Due to GME’s small market cap and low trading volume, institutional investors began borrowing stocks to short, with short interest reaching 140% of total shares, creating an extremely crowded short position.

This news ignited the Reddit forum WSB. Many retail investors decided to collectively buy GME to force Wall Street to admit defeat. In January 2021, the stock price skyrocketed, from $30 to a peak of $483 within two weeks.

Shorts were forced to cover due to margin calls, with media reporting losses exceeding $5 billion. A week later, the stock plummeted over 80% from the high. Later, WSB users also hyped stocks like AMC and BlackBerry, which had high short interest, causing similar short-term surges followed by rapid declines.

Tesla’s Fundamental-Driven Short Squeeze

Tesla’s situation changed dramatically after Elon Musk took over. Although initial sales were limited and the company was unprofitable long-term, electric vehicles were seen as the future trend, and the stock price kept rising. Plus, Tesla’s large market cap and high liquidity made it the stock with the highest short interest.

The turning point came in 2020 — the company turned profitable, and the Shanghai Gigafactory contributed to explosive revenue. Within half a year, the stock rose from $350 to $2,318, then underwent a 5-for-1 stock split. Later, within a year, the price broke $1,000 from over $400 (peak at $1,243). In just two years, the stock nearly 20-folded, causing massive losses for short sellers.

This is a typical fundamental-driven stock price surge, but the global QE policies in 2020 also played a significant role.

4. What to Do When Facing a Short Squeeze?

Short selling is like robbing a bank — safety and exit are the top priorities. The maximum profit from shorting is when the stock price drops to zero, but if a short squeeze occurs, the price can skyrocket multiple times or even dozens of times in a short period, making shorting a “limited profit, unlimited risk” strategy.

Strategy 1: Exit High Short Interest Positions Promptly

If short interest exceeds 50% of circulating shares, even if the stock remains weak, you should close your short early. Small gains or losses are less important; the key is to protect your principal.

Observe the RSI indicator:

• RSI between 50~80: Bulls are stronger than bears; market favors long positions; bears should be cautious
• RSI between 20~50: Bears are stronger than bulls; market favors short positions
• RSI below 20: Oversold condition, market has lost rationality, price reversal is likely, bears must exit promptly

Strategy 2: Monitor Short Positions Before Participating in a Short Squeeze

If you want to join a short squeeze as a “short squeeze participant,” you must monitor short interest. As long as short positions keep increasing, you can continue to participate in the squeeze. But once you detect short covering, immediately take profits and exit.

Because these buy orders are not based on company fundamentals but are simply short covering trades, once the short squeeze ends, the stock price will quickly fall back to its reasonable value. The price swings will be very intense.

5. How to Avoid Becoming a Short Squeeze Victim

A short squeeze typically requires two preconditions: excessively high short interest and extremely high market attention.

To profit smoothly from shorting, investors are advised to choose major indices or blue-chip stocks as short targets. These assets have high liquidity and are less likely to develop overly crowded short positions.

In a bearish market, it’s best to wait for a market rebound before shorting, rather than rushing to catch the bottom. Borrowing stocks to short can easily lead to forced covering risks. Using CFD contracts allows better control of leverage.

Another hedging method is to go long on individual stocks while shorting the market index, with a 1:1 ratio. As long as the stock’s upward movement exceeds the index or its decline is less than the index, you can earn steady profits.

In summary, a short squeeze is a deadly threat to short sellers. Investors should not only monitor order book movements but also closely track changes in stock fundamentals and news. After all, a single positive news can cause short sellers to lose everything, with years of accumulated profits evaporating in an instant. Exercise caution.