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Technology Stocks : STAR Telecommunications (STRX)
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To: Spaw who wrote (211)7/14/1998 12:43:00 AM
From: Art C.  Read Replies (1) of 780
 
Spaw---normally the mechanics of a short squeeze has nothing to do directly with options. It does have a lot to do with "short sellers" of the stock--that is the people that borrow the stock at a high price from an institution in hopes that it will go down so that they can buy it back at a lower price and replace the borrowed shares. Good example:

A short squeeze occurs when speculators bet wrong. They initially sell
borrowed shares -- called shorting -- in the hopes of buying them back later at a lower price. If the shares rise instead, they are forced to snap up the stock to close our their bets, driving prices even higher. That squeezes the remaining short sellers, making their losses even worse.
As of mid-August, 1.65 million shares of Amazon were sold short out
of 3 million available for trade. The other 7.5 million shares
outstanding are owned by insiders.
Normally a company is ripe for a short squeeze when the short
position exceeds 25 percent of the stock that trades. Amazon's short
interest is 55 percent.

Also shorting a stock is always done on margin, so if the stock goes up that leaves the investor vunerable to a margin call as well as having to buy the stock back at a loss. There is unlimited loss potential to a shorted stock if it keeps going up, so at some point, unless they are incredibly stupid or a glutton for punishment, they have to cover the shorted stock. With options your loss is limited to the cost of the premium.

Art
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