This story was updated on Oct. 6 to correct some inaccuracies.
Before 2021 many investors didn’t know about the Mother of All Short Squeezes, also known as MOASS. But the GameStop stock saga early in the year changed that. That scenario saw a rag-tag band of day traders take on the hedge fund giants, with a short-sale “squeeze” that greatly impacted some of those giants.
The episode shined a much-needed light on investors, short-sales, trading squeeze strategies, and digital trading on a massive scale, all of which fell under the MOASS umbrella in 2021.
Table of Contents
Short Squeeze Basics
A short squeeze is an orchestrated effort to drive up shares of a stock that’s being heavily shorted. MOASS, Mother of All Short Squeezes, is a trading strategy in which a high volume of buyers drive up shares of stocks that were being “shorted” by other investors.
A short squeeze trading strategy needs two components to work – a short seller or, more preferably, several short sellers on one side and a group of disciplined contrarian investors who unroll a short squeeze and buy shares of the stock being shorted.
How the MOASS Works
In a short squeeze, short sellers aim to drive a stock’s price downward and profit as the stock declines in value. Short sellers are usually organized institutional investors with enough assets to move a stock in a preferred direction, and they sometimes use dark pools to make their bets.
They do so by borrowing and selling shares of a stock that they believe will decline in value. Then, when the stock price falls, a short seller buys the stock at the reduced price, returns the shares, and pockets the profit.
If the short seller makes the right call, meaning the price does fall, they earn the difference between the price when they entered the short position and the lower stock price at which they bought to cover. If the short seller makes the wrong call, and the price goes up, the investor must buy the stock at a price higher than when they entered the short position, thereby losing money – and negating any potential for a profit.
As short sellers wind up leaving their short positions when they execute a buy order on the stock, those short-squeeze buy positions get noticed by other investors, who also jump in to purchase the stock. That, in turn, drives the stock’s price even higher, since there are fewer shares of the stocks available to purchase.
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Short-sellers, highly alarmed by the rising share price, also issue buy orders on the stock to exit the short sale strategy and reduce their investment risk, which completes the cycle and puts the short squeeze in full effect. This can result in the short sales losing money and the MOASS trader making a profit on the rising stock price.
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GameStop: The Prime Example of MOASS
A good example of MOASS in action is the GameStop saga in early 2021. At the time, several hedge fund firms had “shorted” GameStop stock, which essentially meant betting the share price of the stock would decline. That didn’t happen with GameStop shares.
Instead, a group of day traders hanging out on a Reddit investing platform called Wallstreetbets banded together and started buying up shares of GameStop stock. The gambit worked, with GameStop shares skyrocketing from $19 per share to around $350 per share. The retail investors had successfully “squeezed” the short sellers, causing several hedge funds to lose hundreds of millions of dollars on their short positions on GameStop.
If the short squeeze works, the share price will continue to rise and the short investors, many of whom have fixed deadlines built into their short sales positions, will have to sell their shares and cut their losses, thereby driving the stock price even higher. That rewards the short squeeze investor, who profits from the rising share price, especially as other buyers enter the fray and drive the share price up even higher.
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Once victory was declared with the GameStop short squeeze, the Reddit traders turned their attention to other stocks where short selling activity was particularly high. That group included AMC Entertainment Holdings (AMC), Koss Corporation (KOSS), and Blackberry Ltd. (BB), which all saw share volumes rise after the MOASS traders entered the fray.
Thus, a series of short squeezes that target more and more short sellers is really what MOASS is all about – squeezing enough short-sellers to achieve critical mass in the trading markets, and making huge profits in the process.
MOASS Trading Tips
Investors who want to participate in the next short squeeze effort should be careful. So-called “meme” stock trading can be fraught with risk, especially if you’re left holding the bag after other short-squeezers sell out of their positions before you do.
Take these risk considerations with you before participating in a mass short squeeze play.
Buy Minimally to Limit Losses
While the adrenaline level can be high when participating in a short squeeze trading event, tamp down emotions by limiting the amount of money you invest in a GameStop-type situation. It may be relatively boring to do so, but your money is likely better in a well-researched fund that has a good management team and a history of solid portfolio performance results.
As the old gambling adage says, never risk money you can’t afford to lose. That goes double when chasing the thrill of a MOASS scenario.
Expect to Lose Money
Chances are good that you’ll lose money at some point with a short squeeze play.
Nothing is guaranteed in the stock market and that’s especially the case as short-sellers have learned their lesson after the GameStop fiasco, and grow more cautious about their investing habits. MOASS trading patterns can be something of a roller coaster ride for investors, and the odds that your ride will dip along the way are high. That can translate into days or even weeks of your short-squeeze buying strategy where your investment returns are written in red ink.
MOASS Tip: Have a Plan to Sell Quickly
Short squeeze investing isn’t exactly an orderly process and you need to put your interest first ahead of other MOASS investors. Why? Because volatility can be high and prices can swing at a moment’s notice when trading MOASS-themed stocks. Additionally, nobody really has any idea how high a price can go with a short squeeze in play, and nobody really knows if a stock will rise higher at all.
That’s why it’s a good idea to have a fixed “sell price” in mind when engaging in a short squeeze situation – a stop loss order to automatically sell the stock at a specific price can be a good idea in this scenario.
If you buy a targeted MOASS stock at $50 and it goes to $70, there’s no way of knowing if the stock will go any higher – it might and it might not. Worse, the price could slide back to $30 when buyers lose interest in the stock.
Having a good investment exit strategy in a short squeeze scenario, can help minimize investment losses and capitalize on a stock increase when and if it happens.
Short squeeze trading strategies can bring a great deal of portfolio-shaking volatility to the investment table, and there are plenty of heavily shorted stocks that could be the next MOASS, but it’s impossible to know which one could trigger a squeeze. That means MOASS may not be the best strategy for long-term investors or those with an aversion to risk. A short squeeze takes a significant amount of discipline, patience, and attention on the part of the investors, with continual risk in play until the squeeze is played out.
If you’re ready to try your hand at investing, one way to get started is by opening an online stock trading account on the SoFi Invest® investment app. You can use it to buy stocks and exchange-traded funds right from the SoFi app.
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