Short Squeeze Cases

By 2008, Volkswagen was widely seen as overvalued. In the midst of the global financial crisis, hedge funds had built large short positions in VW stock — a seemingly rational bet that the auto sector would decline.

What they did not know: Porsche had been quietly accumulating VW shares and, crucially, cash-settled call options on VW stock since 2005. Under German law at the time, cash-settled options did not trigger ownership disclosure requirements — so Porsche's true exposure was invisible to the market.

By October 2008, Porsche effectively controlled 74.1% of VW's shares through direct ownership and options. The German state of Lower Saxony held another 20.1%. This left only ~5.8% of VW's shares freely tradeable — against a short interest of approximately 13%.

On October 26, 2008, Porsche announced it had increased its stake to 74.1% and intended to reach 75%. The market immediately understood the implication: there were not enough freely tradeable shares to cover the outstanding short positions.

Short sellers scrambled to buy shares that did not effectively exist. VW's stock price surged from €210 on October 24 to an intraday peak of €1,005 on October 28 — briefly making Volkswagen the most valuable company in the world by market capitalisation, surpassing ExxonMobil.

Hedge funds collectively lost an estimated €30 billion. Porsche, by contrast, made approximately €6–12 billion from its options positions — more than it had ever earned from making cars.

GameStop (GME) was a struggling brick-and-mortar video game retailer in structural decline. By late 2020, its short interest had reached ~140% of the float — meaning more shares had been borrowed and sold short than actually existed. Major hedge funds including Melvin Capital had large short positions.

On the Reddit forum r/WallStreetBets (WSB), retail traders began coordinating to buy GME shares and call options. The thesis was partly fundamental (Ryan Cohen, founder of Chewy, had joined the board), but primarily mechanical: force a short squeeze by driving the price up and triggering margin calls.

The gamma squeeze amplified the effect: as retail traders bought out-of-the-money call options, market makers who sold those options had to buy GME shares to hedge — creating additional buying pressure beyond the direct retail purchases.

GME surged from ~$17 on January 4 to an intraday peak of $483 on January 28 — a gain of over 2,700% in three weeks. Melvin Capital, one of the largest short sellers, closed its position on January 27 with a 53% loss for the month, requiring a $2.75 billion emergency injection from Citadel and Point72.

On January 28, Robinhood and several other brokerages halted buying of GME (allowing only selling), citing clearinghouse margin requirements. This triggered a sharp price decline and intense public controversy, with retail traders accusing the platforms of protecting institutional short sellers.

By February 5, GME had fallen back to ~$63. The SEC launched an investigation and published a detailed report in October 2021, finding no evidence of illegal coordination but noting structural vulnerabilities in the market infrastructure.