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I have a question that might appear simple for the more experienced here.

I'm trying to understand the concept behind short squeezes and i'm a little lost.

From what I understood:

Short selling consists of borrowing shares selling them and buying them back at a later point in time. The time when the shares need to be bought back is at a fixed point in time.

The time needed to cover short is calculated by the short interest. The higher this number is the more convicted bears are about their negative position.

Short sellers are very sensitive to a rise in the stock price often leading to short squeezes which in turn have a snowball effect on other short sellers needing to cover their positions. In this paper it stated

short selling of a stock does not completely translate into an increase in short interest. https://www.fmaconferences.org/Orlando/Papers/Short_selling_duration_and_return_predictability.pdf

My first question is: Is there a way to find out what the critical price of the stock aproximately is at which point most shares were sold short?

My second: Why not buy put options instead since the theoretical downside is limited compared to short selling where the downside is unlimited.

thank you in advance for any input!

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Is there a way to find out what the critical price of the stock approximately is at which point most shares were sold short?

Not that I am aware of, however, there is a way to find the Daily Short Sale Volume Ratio. Dividing the daily aggregate reported share volume of executed short-sale trades during regular trading hours by the daily aggregate reported share volume of all executed trades during regular trading hours. You would need to purchase this information from an exchange. I wouldn't doubt that you can obtain lower-level data (such as actual time and sales of short-sales) if you were willing to pay for them.

Why not buy put options instead since the theoretical downside is limited compared to short selling where the downside is unlimited?

There are several reasons. For the sake of keeping this simple, here are two basic reasons I can think of for your consideration: Firstly, by owning an option outright, you own a wasting asset. Owning something that is wasting away is generally undesirable for most investors because you need to be right not only in the direction you have picked but within a given amount of time. Secondly, in the owning of options, the clock is ticking against you, and there are three ways an underlying can go: Up, Down, or Sideways. If you own a put option, you lose on two out of those three (Up and Sideways), and the third direction (Down) can also be a loser if the move in your desired direction isn't large enough to cover the premium you paid. So, the trade-offs here are time and risk. Owning an option limits your time to be correct, but caps your risk to the premium paid, a short position has no time constraint but also has no risk limit. Which one is chosen by an investor depends on the type of investor they are and what suits them best.

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  • $\begingroup$ Thank you I feel a lot more confident in this now! I'm going to keep looking for the critical price of stock out of sheer curiousity. I'll post back here if I find anything. Thanks a lot I appreciate it! $\endgroup$ – Jorisdrees May 11 '20 at 13:50
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    $\begingroup$ There is a website called shortsqueeze.com (I have no affiliation) that has lots of short info. I don't think they have the 'critical price' you are seeking though but may be worth checking out $\endgroup$ – amdopt May 11 '20 at 14:47
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    $\begingroup$ @Amdopt, is the daily short sale volume really indicative of short positions? My understanding is that market makers who sell to fill buy orders (without inventory) are required to mark their trades as short sells? But really this is transient since the MM will cover their short so quickly. $\endgroup$ – user13499466 May 11 '20 at 15:05
  • $\begingroup$ Thanks you are too kind! $\endgroup$ – Jorisdrees May 11 '20 at 15:32
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    $\begingroup$ @user13499466 Yes, you are correct. That number may not be indicative of an 'active' short position that could be involved in a squeeze or 'critical price' that the OP is seeking for more than a few moments. $\endgroup$ – amdopt May 11 '20 at 15:55

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