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So I posted this question on another users post about short squeezes relating to these tickers.. Instead of answering it, the person deleted it. It was disappointing because I respect the poster and have nothing against him. In fact, I respect his knowledge which is why I asked him the question. Given that I’m genuinely looking for an answer I’m going to post it for everybody to see if anyone has the answer.
I can understand why perhaps a retail short who borrowed shares on margin would be required to possibly close their position if one of these stocks spiked but retail short positions are minimal compared to institutional short positions. Because institutional short positions are opened with naked shorting, why would they be compelled to buy to cover on a day when one of these tickers spiked because of retail buying driving up the price? Why wouldn’t they instead simply wait a day or two for the inevitable dump that follows the pump if they want to buy to close? In fact when the price spikes, wouldn’t that be a great time for them to open a new naked short position from an even higher price point? At a very minimum they have two trading days because of T+2 settlement to come up with those shares and realistically they have up to 35 days to deliver the shares to the broker. Even if you look at the spike in GameStop, it’s clear that what drove the price up wasn’t The orange portion (which was purchases to close short positions), it was instead the aqua portion which was standard buying demand.
Institutional volume is 85% of all daily traded volume both long and short. Why would they be forced to cover if/when these spike?
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I block accounts with no name, pic, trading history or posts that try to follow me. Sorry hedges
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Mcsnacks H Tupack : You have to remember these positions have interest rates on them. When interest rates outweigh the risk they are accepting it’s better to cover because they can get stuck with high interest rates and heavy losses if they cover combined. Especially if their leverage is running low because they lose that then they lose all their positions in the market.
Mike Hunt OP Mcsnacks H Tupack : Perhaps retail shorts covering is adequate surplus demand to move stock price? But I don’t see institutional shorts being forced to buy to cover on the 1-3 days the price spikes
Mcsnacks H Tupack Mike Hunt OP : These positions are all tied together for them. If they have a lot of short positions and the market increases it will put stress on what leverage they have. And they have to maintain their leverage if not the whole company can be bankrupted in a single day. One crack and it could be their downfall.
Mcsnacks H Tupack Mcsnacks H Tupack : Plus they hedge stocks that have options. So they can work it up and down. Sometimes them covering helps if they have call options.