The ins and outs of short squeezes — and how to avoid getting burned by them

As a consumer of CNBC, you have probably heard the term "short squeeze" — and the warnings for investors trying to ride one. Perhaps no short squeeze is more memorable in the past decade than what happened to GameStop in early 2021, when an army of Redditors led by the outrageous Keith Gill, a.k.a. Roaring Kitty, revolted against the investment establishment. At the time, a hedge fund called Melvin Capital was massively short the videogame retailer, via a combination of direct short selling and put options. Selling short and put options are essentially bets that a stock will go lower. (Don't worry, we will go step-by-step through the mechanics of shorting below.) Not well known in the investment community, Gill hopped on Reddit to pitch reasons to invest in GameStop in the subreddit WallStreetBets. The WallStreetBets community jumped on the name and began going long by buying shares and call options. GameStop shares ripped 1,500% higher in January of 2021, crushing Melvin Capital and others who were short. GME mountain 2000-12-01 GameStop from December 2000 to the present It didn't take long for the short squeeze to unravel, as GameStock lost much of those gains a month later. Despite years of new leadership, plans to revive the company, new share offerings, and periodic efforts by folks on WallStreetBets to juice the stock gain, GameStop has never come close to reaching those dizzying heights again. Some regular investors made money by jumping on that rocket ship. …