Short Covering

Short Covering: Short covering refers to the act of buying back Securities that were previously sold short. Investors sell short when they believe that the price of a security will decline, allowing them to repurchase it later at a lower price. When the price rises instead, short sellers must buy back the Shares to limit their losses, which can lead to increased demand and further price increases.

Examples:

• A trader shorts 100 Shares of Company X at $50, expecting the price to drop. If the price rises to $60, the trader may cover their position by buying back the Shares to prevent further losses.
• During a market rally, many short sellers in Company Y rush to cover their positions as the Stock price climbs from $30 to $45, resulting in a rapid price increase due to the surge in buying activity.

Cases:

• Case 1: A significant earnings surprise causes Company Z’s Stock to jump unexpectedly. Short sellers who bet against the Stock scramble to cover their positions, leading to a sharp price increase.
• Case 2: In a Short Squeeze scenario, where many investors are Stock/">Shorting a Stock, any positive news can trigger mass short covering, pushing the Stock price higher and creating a feedback loop of buying pressure.