During a short squeeze, the price of an asset rises, because there is a lot of demand from many traders at the same time.
During a short squeeze, the price of an asset rises, because there is a lot of demand from many traders at the same time. It comes after a period of price decline (during which people have been consistently selling).
Short sellers expect that the price of an asset will fall. They “borrow” the asset at T=0 and promise to return it back at T=1 (at T=1 they buy the asset from the market to return it to the lender). If they’re right, they return the asset and pocket the difference between the price at T=0 and the price at T=1. If they’re wrong, they’re forced to buy at a higher price at T=1 and pay the difference between the price they’ve set at T=0 and its sale price at T=1.
The moment when a short seller buys the asset in order to return it to the lender.
When there is positive news in the market, traders expect that prices of an asset will rise. If this happens between T=0 and T=1, they get scared that they will have to pay very high prices at T=1 when they’d have to exit their short positions. So, short sellers exit their positions earlier if there is positive news in the market.
A short squeeze happens then a lot of short sellers exit their shorts at the same time. This means that there is a lot of buying activity introduced in the market simulateneously. As we know, more buying drives prices upwards.
So, at the end of the day, we are left with
As gas plants came under attack in Ukraine, gas prices increased a lot within a short timeframe, in turn driving up EUA prices. As a reminder, the introduction of additional RepowerEU volumes and negative clean spreads have led to increased short selling activity. Therefore, when news emerged last week that boosted EUA prices, it triggered a short squeeze, further propelling EUA prices upwards.
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