how does a short squeeze work 
short sellers make their trades expecting that the price of a stock will fall when a heavily shorted stock unexpectedly rises in price instead the short sellers may have to act fast to limit their losses short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall if they re right they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position if they re wrong they re forced to buy at a higher price and pay the difference between the price they set and its sale price because short sellers exit their positions with buy orders the coincidental exit of these short sellers pushes prices higher the continued rapid rise in price also attracts buyers to the security the combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented a short squeeze gets its name because short sellers are being squeezed out of their positions usually at a loss short sellers zero in on a stock that they think is overvalued by the market for example tesla inc tsla captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles investors bet heavily on its potential short sellers bet heavily on its failure in early 2020 tesla was the most shorted stock on the u s exchanges with more than 18 of its outstanding stock in short positions 1from late 2019 through early 2020 tesla stock soared by 400 short sellers got hammered collectively losing about 8 billion 1 in early march 2020 tesla s stock finally fell along with most others during a market downturn however the stock eventually bounced back leaving tesla short sellers collectively nursing losses of more than 40 billion during the course of 2020 2