A long squeeze is the opposite of a short squeeze. Investors who take a long position are betting that the asset’s value will rise over time. But investors with a short position seek to profit from a price drop. Essentially, they borrow an asset and sell it in hopes of buying it back at a lower price and profiting off the difference. A short squeeze happens when investors with a short position panic and rush to close out their positions, driving up the price further. Long squeezes can also occur in commodity markets. An example of a long squeeze occurred in April 2020, when the price of a futures contract for West Texas Intermediate, the U.S. benchmark for crude oil, went negative for the first time in history. On April 20, 2020, the price of a futures contract with a settlement date in May 2020 dropped by $55.90, closing at negative $37.62 per barrel. In commodities trading, traders need to sell their futures contract before the expiration date to avoid having to take physical delivery of the commodity—oil, in this case. But with demand for oil plummeting due to COVID-19 and an oversupply triggered by increased production, traders who were unable to accept physical delivery needed to exit their positions quickly. Otherwise, they’d face hefty penalties and fines.
Long Squeeze vs. Short Squeeze
In a short squeeze, the asset’s price soars. As a result, investors with long positions profit. Because there’s theoretically no limit on how high an asset’s price can climb, investors with short positions face unlimited potential losses during a short squeeze.
What It Means for Individual Investors
A stock is more vulnerable to a long squeeze if it has a limited float, which is the number of shares available to the public. When there’s a limited float, it takes fewer people to have a major influence on the price. Likewise, if the price has risen rapidly, the market may decide the stock is overvalued, particularly if there’s bad news that affects the company. For example, if management reports poor financial performance, the stock’s price may drop, which could trigger other investors to sell off, leading the stock price to tank even more. Even though it’s technically possible to lose the entire amount you invested in a long squeeze, that’s unlikely to happen. The key goal of value investors is to find stocks and other assets that the market has underpriced. If an asset price drops significantly, it’s likely that a value investor would seize on the opportunity to buy it.
