Did you know that at one point, GameStop (GME), the high-flying meme stock, had 140% of its total outstanding shares shorted? This is according to the book, The Antisocial Network (now republished as Dumb Money).

It is possible for a stock to have a short interest exceeding 100% of its outstanding shares. However, this is relatively rare and can occur due to several factors, such as the following.

1. Naked Short Selling: This illegal practice involves selling borrowed shares without first locating them. While most brokers have safeguards to prevent naked short selling, it can still happen, especially with less-regulated stocks. In such cases, the number of shorted shares can temporarily exceed the number of outstanding shares.
2. Share Lending and Relending: When shares are borrowed for short selling, they can be re-lent to other short sellers multiple times. This can create a situation where the total number of shorted shares appears to be more than the number of outstanding shares, even though no naked short selling has occurred.
3. Synthetic Short Positions: These positions involve using derivatives like options or futures contracts to mimic the effect of short selling. While not directly borrowing shares, these positions can still contribute to the overall short interest and push it above 100%.

It is probably the lending and relending that contributed the most to the short interest in GameStop going over 100%.

A short squeeze is a phenomenon that occurs in financial markets when investors who have sold shares of a stock short (i.e., betting that the stock price will fall) are forced to buy those shares back at a higher price than they expected. This can happen when the stock’s price rises sharply, causing losses for short sellers who need to buy the stock to cover their position and limit their losses.

As more and more short sellers try to buy the stock to close out their positions, this increased buying activity can drive the stock price even higher, creating a feedback loop that can lead to a rapid and dramatic increase in price. This can create a challenging situation for short sellers, who may be forced to buy back the stock at a loss, or risk even greater losses if the stock continues to rise.

A short squeeze can also create opportunities for long investors who have purchased the stock, as they may be able to sell their shares at a higher price to short sellers looking to cover their positions.

When you short a stock, it means that your goal is to make money from a drop in the price of a stock. Technically, what happens is that you borrow shares of a stock, sell those shares, then buy back those shares at a hopefully lower price so that those shares can be returned. This all happens electronically, so you don’t actually see all the borrowing and returning of shares; it just shows up on your screen as a negative number of shares.

Short selling can be profitable, but sometimes when the stock moves against short sellers and begins to rise, the short sellers jump in right away to buy shares to cover their positions, creating what is called a short squeeze. When a short squeeze takes place, it can cause the share prices to increase fast and furiously. Any good news can trigger a short squeeze.

Some traders utilize this situation by looking for stocks to buy that may have a potential short squeeze. Here is what a short squeeze trader should take into consideration:

• Short Percentage of Float: The float is the number of freely tradable shares and the short percentage is the number of shares held short divided by the float. Amounts over 10% to 20% are considered high and potential short squeeze plays.
• Short Ratio/Days to Cover/Short Interest Ratio: This is probably the most important metric when looking for short squeeze trades, no matter what you call it. This is the number of days it would take the short sellers to cover their position based on the average daily volume of shares traded. This is a significant ratio, as it shows how “stuck” the short sellers are when they want to buy in their shares without driving up the price too much. Unfortunately for the short sellers, the longer the number of days to cover, the bigger and longer the squeeze.
• Short Percentage Increase/Decrease: This is the percentage increase in in the number of short sellers from the previous month.

The following are some heavily shorted stocks that have short interest above 40%.

The second stock on the list, Novavax Inc. (NVAX), has almost 44% of its float shorted, with an 8% increase in short interest seen over the last month. The short interest ratio is 6.5, which means that it would take the short sellers over six days to cover their position, based on recent average volume.

Just keep in mind that just because a stock has a good short interest ratio and is heavily shorted, that doesn’t mean that the stock will go up -- especially in a bear market.

In addition, a stock's short positions and other data can change at any time. Also, stocks that are significantly shorted may end up just being lemons instead of lemonade.

More By This Author:

Top Cell Tower Stocks
Monthly Dividend Business Development Companies Paying Over 9%
Crazy Woman Holding Your Money?