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Fear the Short Squeeze?

 

Should we fear the short squeeze?

There’s nothing a bear loves more than shorting a bounce that quickly leads to a reversal into new lows. For many (myself included), that is the game plan for swing trades in a downtrend: get short on the reversions to the mean.

While this is certainly a strategy that has merit, there’s always one thing the bears fear most looming in the distance: the short squeeze.

When the market reaches oversold readings and too many market participants are leaning short, the potential for a short-squeeze is always around the corner. In fact, you’ll see some of the biggest/rapid moves to the upside in a downtrend, all as a result of the market trapping shorts and squeezing them.

For those who have been short during a short squeeze, we know it can be an unpleasant experience. While it can be uncomfortable taking heat against our open positions, there’s a few adjustments you can make to put yourself (and your shorts) in a position to remain comfortable. 

 

 

Here are my tips for handling “the short squeeze heat”

  1. Get short into bounces, NOT when the market is deeply oversold. I look to get short near the daily 21 exponential moving average (EMA).
  2. Give your trades more time time till expiration. While short squeezes can be violent, they tend to be short-lived. Giving your trade more time till expiration will make it easier to sit through those rips.
  3. Sell call credit spreads. Selling out-of-the-money credit spreads with 30 to 60 days till expiration is a great way to get positioned for a bigger picture move lower, while still being able to sit through the ebbs and flows. So long as the market closes under your short strike at expiration, there’s a paycheck with your name on it.

So don’t fear the short squeeze! Instead, make adjustments that put you in a better position to stay confident in your trades during large bounces.

Trade with confidence during these short squeezes with Taylor’s daily market and trade alerts. Start a $7 trial today and start taking advantage of these large, volatile moves.

Stay Focused!