Watching a Short Squeeze From the Inside

Day one. The stock opened up four percent on nothing. I looked. There was no filing, no upgrade, no broker note I could find, and the volume was heavier than the name usually did in a full session by lunchtime. I shrugged. The thesis was a multi quarter thesis and this was a Tuesday.

It closed on its highs.

Day two, the tape changed texture

Every pullback was bought within minutes. Size on the offer kept vanishing before it could be hit. That is a different thing from being hit. Prints came in the pattern you see when the buyer has a reason that has nothing to do with what the company is worth.

Short covering is not price sensitive. The person sending that order needs the shares. The price is whatever it takes. They are competing with everybody else who needs them for the same reason.

I had known the position was crowded before I put it on. Short interest was high against the float and days to cover, which is short interest divided by average daily volume, was in the range where it stops being a statistic and starts being a description of how wide the door is. I filed it under evidence I was right. A lot of people holding the same view was agreement, and it reads like agreement right up until the moment everyone tries to leave, at which point it becomes the thing that determines how fast the exit moves.

Day three, the borrow desk repriced me

This is the part that actually decided it. It happened away from the chart.

The annualized fee to borrow the shares went from single digits to something in the forties. That fee is charged daily against the position. On a $50,000 short, 50,000 x 0.08 / 365 = 10.96 a day is background noise you can ignore for a quarter. 50,000 x 0.45 / 365 = 61.64 a day is a different trade, and I had not agreed to it.

I spent the afternoon doing arithmetic I should have done before the trade, which is a reliable sign that a position is running you.

Day four

I covered into strength. That is a polite way of saying I bought the shares back near the highs alongside everybody else who had run out of room, on a day when the people I was buying from knew exactly why I was there.

Let me be precise here. The valuation argument was correct. Over the following year the stock did something that made it look fine. I was not there to see it. The trade was closed by carrying cost and mark to market. Neither of those has an opinion about whether you are right.

That is the specific way a short differs from owning something bad. When you own a falling stock, the position shrinks as it goes against you and your cost of carry is zero. When you are short a rising one, the position grows as it goes against you, the borrow can be recalled, the fee can jump, and there is no ceiling on the loss.

I do not have a clean rule out of this

I would like to end with the fix. What I have is smaller.

I check the borrow rate before the trade and I ask what happens if it triples, which the short selling calculator will answer in about a minute, and the answer has never once matched the number in my head. I size shorts smaller than longs on the same conviction. Permanently, as a rule, with no judgement involved. I stopped reading high short interest as confirmation.

None of that would have saved this trade. If the fee had been double at entry I would probably have shorted it anyway, slightly smaller, and been carried out on day four at a slightly better price. The honest version is that I was in a position whose clock I did not control and whose meter somebody else could reset, and I had sized it as though I controlled both.

The mechanics from borrow and locate through recalls and squeezes are laid out in short selling explained. The sizing framework is in risk management for traders, and the part where I sat arguing with the tape for three days about a fee that was already charged belongs in trading psychology and discipline.