Short squeezes occur when traders who have bet against a stock are forced to buy it back as prices rise sharply. A short seller borrows shares, sells them, and hopes to repurchase them later at a lower price. When the price moves higher instead, losses grow quickly, creating pressure to exit the position. To close the trade, short sellers must buy shares, which adds extra demand and pushes the price up even further.

One key driver of a short squeeze is high short interest. When a large portion of a stock’s available shares is sold short, even a small positive catalyst can trigger panic among short sellers. Strong earnings, unexpected news, or increased buying from retail traders can start the move. Limited share supply makes the situation worse, as there are fewer shares available for shorts to cover.

Margin requirements also play a major role. As prices rise, brokers demand more collateral from short sellers. If traders cannot meet these margin calls, their positions are automatically closed, forcing more buying into an already rising market.

Psychology amplifies the squeeze. Fear of unlimited losses causes shorts to rush for the exit at the same time. This feedback loop turns buying pressure into explosive price moves.

In the end, short squeezes are driven by forced demand, tight supply, and emotion. They often fade once most short positions are closed and natural buyers step away.