Hedge funds lose $30 billion on VW infinity squeeze

Looking at the above, it is clear that heading into October of 2008, around 55% of VW shares were already unavailable in the market for any realistic purposes. As a result, when Porsche increased its stake by an additional 44%, how to become a python developer it meant that the true available float went down from 45% of outstanding shares to around just 1% of outstanding shares. Suddenly the seemingly “low” short interest of 12.8% turned in to a massive supply and demand imbalance.

  • By late 2008, short positions were 12 percent above outstanding shares.
  • Volkswagen (VOW3) stock became one of the targets of retail investors in the early 2021s during the so-called “meme stock” frenzy.
  • When you short sell a stock, you borrow it from your broker at the prevailing interest rate and sell it in order to repurchase it later at a lower price.
  • The German financial services regulator BaFin took note of the unprecedented rise in Volkswagen stock price and started examining evidence of market manipulation, insider trading or other wrongdoings.
  • This resulted in the price progressively climbing to higher levels in the following months.

Short sellers desperate to close their positions paid as much as 1,005 but when the short squeeze comes to an end, there are not enough shares available to bring the. Access our live streaming chart for the volkswagen ag stock, free of charge. This forces short sellers to cover their short interest positions by buying actual shares of vwagy, which in turn drives the price of the stock up even further. The greatest short squeezes pretty much originate when a person or group attempts to corner the market.

The Epic Volkswagen Short Squeeze Explained

The large influx of short sellers simultaneously closing their positions pushes up the demand for the stock and increases buying pressure, which catapults the stock even higher. They have to decide whether to close their position quickly to cut their losses or wait for the price to drop, which entails an even higher risk as losses can mount if the price climbs further. However, for some heavily invested institutional short sellers, this isn’t as easy as clicking a button.When a short squeeze occurs, traders with short positions rush to close their positions and buy the stock at prevailing higher prices. This leads to a high buying pressure on the stock, which pushes the stock price even higher. With the incremental rise in stock price, more and more short sellers succumb and are forced to take their losses by margin calls. Typically, when most of the short sellers are forced out of their positions, the stock usually plummets to its pre-squeeze levels.

  • Short sellers desperate to close their positions paid as much as 1,005 but when the short squeeze comes to an end, there are not enough shares available to bring the.
  • Here is an example of WeBull’s take on short interest and days to cover.
  • However, Porsche did not stop buying shares of VW as market participants expected.
  • However, for some heavily invested institutional short sellers, this isn’t as easy as clicking a button.When a short squeeze occurs, traders with short positions rush to close their positions and buy the stock at prevailing higher prices.
  • Dissimilar to Volkswagen’s 2008 escapade, the modern-day short squeeze was more dramatic.

So far for GameStop, the stock tumbled 30.8% to $225 apiece Monday from Friday’s close of $325. The shares dropped another 60% Tuesday, bringing their two-day losses to more than 70%. Volkswagen often comes to mind when investors try to find a short squeeze comparable to GameStop’s jaw-dropping spike last week.

GME Short SQUEEEEEEEEZE vs historical VW

VW’s share price briefly exceeded €1,000 intraday with a market cap of over €300 billion. The October 2008 short squeeze on shares of Volkswagen AG has since been referred to as the “Mother of all Squeezes”. It was during the middle of the worst financial crisis since the Great Depression, and Volkswagen was increasingly being viewed as a potential bankruptcy candidate. In other words, Volkswagen was viewed as an exceptionally attractive short candidate.

Ultimately, the only thing that matters to investors is realized gains and losses. Short squeezes tend to happen in stocks that have expensive borrow rates. Expensive borrow rates can increase the pressure on short sellers to cover their positions, further adding to the reflexive nature of this phenomenon.

Short squeeze

Most of what is written on this site will reflect a preexisting bias since the author is often writing about situations where he had already felt strongly enough to commit money to a trade. The author will often continue to trade in these securities for an extended period of time after publication. Market conditions and issuer specific facts may change and may result in the author closing positions or, in some circumstances, changing direction of the trade vs. the position originally reported. Things like links and screenshots are included using sources which the author believes to be reliable.

The bulk of the Volkswagen short squeeze lasted just four days, after which shares had fallen 58 percent from their peak. However, it took weeks for VW stock to falter enough for most of the squeeze to have been returned to hedge funds at last. The rally was initially triggered by a surprise announcement that Porsche had boosted its VW stake, which sent a slew of short selling hedge funds rushing for the exit. If the price of the asset unexpectedly rises, short sellers are forced to buy the stock to close their positions.

Short Interest Percentage

There seemed to be little risk of Porsche having any realistic ability to corner the market on its much larger rival VW. On October 26th, 2008, rival automaker Porsche made a surprise announcement that it had increased its stake in VW to over 74%. It was a stealth move, made possible through the use of multiple purchases of cash-settled derivatives which had been accumulated separately through different European investment banks.

Millions of shares needed to be bought immediately even though there were simply no shares available to be sold. However, when the stock jumps sharply higher, it forces short sellers to buy back shares in order to limit their losses, which leads to a so-called short squeeze. Over the longer term, VW’s share price ended up falling significantly. And over the long term, this outcome was certainly quite predictable. But from a financial standpoint, investors who shorted VW shares at what appeared to be the optimal time suffered very steep trading losses.

As the shares were borrowed, the short-seller must eventually return them to the lender (plus interest and dividend, if any), and therefore makes a profit if they spend less buying back the shares than they received when selling them. However, an unexpected piece of favorable news can cause a jump in the stock’s share price, resulting in a loss rather than liteforex review a profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the share price rise further. You can use overbought indicators such as the RSI indicator or Stochastics indicator to determine if a stock is trending upward faster than its peers in the market.

This means that short sellers could close their short positions in 5 days without moving the price of the stock very much, given around 20,000 shares of the company are traded daily. A higher short interest ratio means that short sellers would need more time to liquidate their positions quietly. Short sellers of high short-interest ratio stocks sometimes panic in the event of a short squeeze because of the large number of shorted shares and a low average trading volume of the stock.


Traders should also mind the difference between Volkswagen ordinary vs preferred share prices. On the other hand, shares with the ‘VOW3’ symbol are preferred shares. Preferred shares mean that the owners of these shares have preference in dividend payment and asset allocation in case of liquidation. A short squeeze is the name given to a surge in the price of a certain security caused by unusual activity from short sellers, who need to buy the asset to limit their losses. By late 2008, short positions were 12 percent above outstanding shares.

A short squeeze for volkswagen occurs when it has a large amount of short interest and its stock increases in price. The vw infinity squeeze seemed entirely counter intuitive at the time. Volkswagen, the german carmaker, became the biggest company in the world. The rally was initially triggered hycm review by a surprise announcement that porsche had boosted its vw stake, which sent a slew of short selling hedge. Smack dab in the middle of the 2008 recession, one company bucked the trend. Volkswagen briefly became the world’s biggest company by market value on tuesday reuters/kai pfaffenbach.

On the other side of the coin, some retail investors who bet against the shorts (did the squeezing) won big, while others went in at the peak and have lost comparative fortunes. Hedge funds saw this and thought that Volkswagen stock was majorly overvalued. So, they shorted the stock in much the same fashion that we have seen with AMC, Blackberry, GameStop, and more. Prior to October 2008, Porsche alone had already controlled 30% of VWs shares. Next, the government fund of Lower Saxony (the home province of VW in Germany) owned an additional 20% of VW as a strategic stake.

However, at very depth of the crisis, an orchestrated short squeeze on VW shares caused VW to briefly become the most valuable company in the world, worth more by market cap than Exxon Mobil. The VW infinity squeeze seemed entirely counter intuitive at the time. All infinity squeezes are the result of heavy over-shorting of shares which then become difficult or impossible to cover. Such aggressive over-shorting only occurs when the bear thesis against the fundamentals is conclusively strong and very well disseminated.

Usually, traders look for a short interest percentage in the range of 10% to 20% to select stocks as short squeeze candidates. This buying may proceed automatically, for example if the short sellers had previously placed stop-loss orders with their brokers to prepare for this possibility. Alternatively, short sellers simply deciding to cut their losses and get out (rather than lacking collateral funds to meet their margin) can cause a squeeze. Short squeezes can also occur when the demand from short sellers outweighs the supply of shares to borrow, which results in the failure of borrow requests from prime brokers. This sometimes happens with companies that are on the verge of filing for bankruptcy.

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