A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation – short sellers are essentially being squeezed out of their short positions, typically at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help bolster prices even further.
“It’s the squeeze on short-sellers that we’ve been anticipating after the oil markets saw panic selling and capitulation trade in the $30 levels,” Chris Jarvis, analyst at Caprock Risk Management, told Reuters. “Couple this with strong continued demand for gasoline and solid GDP numbers out of the U.S., and China’s actions to reinflate their economy with a very shorted market, the near-term bounce we have been calling for appears to be working out.”
Leveraged oil ETFs were also jumping on the action. On Thursday, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, was up 15.9% and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, was 24.1% higher. [Investors Capitalize on Oil Swings with Leveraged ETFs]
United States Oil Fund
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Max Chen contributed to this article.