Short-selling is an investment strategy, which aims to force short positions to close by buying stocks, thus pushing up stock prices. Short-selling is a high-risk and high-return investment strategy. Its risk is that if the short position is not closed, the short-selling person will face huge losses.
This article will introduce the principle of forcing empty and how to make money by forcing empty.
What is shorting?
Before talking about short selling, we should first understand what short selling is. Shorting is an investment strategy. When you look short on a stock and expect its share price to fall next, then you can make money by shorting.
There are two ways to short, one is to buy put options and the other is to sell stocks directly. We will only discuss the latter here.
Shorting stocks, in operation, you can sell stocks directly in brokers, that is, borrow stocks from the market and return them in the future. In this process, the broker will charge you interest until you return the stock.
What is forced empty?
When the price of a stock that has been heavily shorted rises instead of falling, it will be forced to be short. For example, a company's stock is expected to fall, but it receives an important piece of good news, and its stock price will soar.
In this case, short sellers will face huge losses because they must buy the shares they originally borrowed on the expiration date of the contract. Short sellers will have to buy shares to close their positions, thus pushing up the stock price.
Therefore, the key to short-selling is good news, which can be the company's performance, or a major event of the company, such as acquisition, or a major cooperation of the company. Put short positions under short-term pressure, thus forcing them to close their positions.
Advantages and disadvantages of forcing empty space
Participating in forcing empty space has advantages and disadvantages. Let's look at the advantages and disadvantages of this investment strategy:
Theoretically, the benefits are unlimited: The biggest attraction of short selling is that short sellers must buy back the stocks they short at the expiration date of the contract, regardless of the price. This means that there is no limit to the total profit you can make from the trade as an investor if there is indeed a short-selling.
The risk to investors is lower than that of short sellers: If you invest in a stock and expect a short market to happen, but it doesn't happen, the most you may lose is the amount of money you invest. On the other hand, short sellers may face losses of more than 100%, and may also be affected by margin calls and interest. If you buy a long-term option, the forecast short becomes less risky, because if the stock price does not rise as you expected, you can choose not to exercise the option.
Possible loss compounding: While correctly shorting may result in almost unlimited profits being realized, being trapped in the hype of shorting may also cost you a loss. For example, in the current forced air of GameStop, the price of GME stock reached a peak of about $347 on January 27, 2021. Just one week later, on February 3rd, the average price of GME stock was $92.41. It wouldn't be a problem if investors bought around October 2020 when GameStop shares traded at around $14, but amid the hype and passion surrounding GME in January, many investors bought for $300 or more. Those who still hold these investments may have lost hundreds or even thousands of dollars with little hope of recovery.
It may leave you with a stock with unstable fundamentals: As we said, the sharp rise in stock prices related to short selling usually has little to do with the fundamentals of the related companies. This means that if you miss the exit point of short selling, holding stocks for a long time may not be a feasible option. Especially considering that stocks with heavy short selling are usually associated with financially failed companies.
Forecast forced empty
Predicting the timing of the squeeze can be challenging. Here are some indicators that can be used to predict when the empty space will come:
High Short Interest Percentage: The more investors or companies that bear a particular stock, the more competitive it is to buy back that stock at maturity. As more investors take short positions on the asset, the interest on the asset rises as demand increases. More investors shorting stocks may make short selling more effective.
High short interest ratio: The short interest ratio of a stock is calculated by dividing the current short interest of the stock by its average daily trading volume. The short interest ratio tells you how long it takes on average for a short seller to close their current position. The higher the short interest ratio, the more likely it is to be short, because the competition for stock repurchase has surged.
Look at an example
On January 25, 2021, it was forced to empty. At that time, retail investors joined forces to set up institutions, and their money was caused by the Federal Reserve epidemic, so they didn't care. In addition, it should be noted that the forced market is not suitable for long-term holding, because the fundamentals of forced stocks are not good, so it is necessary to ship in time when forced.
Should I participate in the empty space?
With the possibility of unlimited profits, participating in short selling may be both stimulating and profitable, which seems to be a good strategy. However, short selling may also bring risks to both short holders and sellers. If you decide to take part in these riskier moves, remember never to invest more than you can afford to lose.
How did I get involved in emptying
It's too hard to bet on breaking news, so I think it's a good choice to bet on earnings day. Seriously shorted stocks have a characteristic. If there is good news, the stock price will soar. For example, the stocks I recently observed and participated in are:
: Better-than-expected financial report, stock price soared by 27%
: Better-than-expected financial report, stock price soared by 26%
: Better-than-expected financial report, stock price soared by 36%
Of course, there are also financial reports that fail, and then continue to fall, but if they rise, they are generally soaring. Therefore, I think it is a good choice to buy a doomsday CALL before the financial report. Although the IV value of options is relatively high, I think it is still worth it.
Pay attention to the high short interest percentage. When the short interest percentage of a stock exceeds 30%, I will pay attention to this stock, and then look at the financial report day. Before the financial report day, I will buy a doomsday CALL as a lottery ticket. This money should be planned to return to zero, so don't invest too much.
View shorted stocks
1.Most Shorted Stocks-Benzinga
2.High Short Interest Stocks
PS: The data of the first two websites are updated every two weeks, but the update instructions of the last two websites are not seen.
Short-selling is a high-risk investment strategy, but if you can correctly predict the timing of short-selling, it may bring huge returns. Choosing financial report is a good choice. In addition, it should be noted that the fundamentals of stocks that are forced to be empty are not good, so it is necessary to ship in time when forced to be empty.