A short squeeze happens when a heavily shorted asset starts rising, forcing short sellers to buy shares to close their losing positions - which pushes the price higher, forcing more shorts to cover, in a self-reinforcing loop. The buying is not conviction; it is capitulation under margin pressure.
The mechanics
Short sellers borrow shares and sell them, hoping to buy back lower. If price rises instead, their losses are theoretically unlimited, and their brokers issue margin calls. To stop the bleeding, they buy to cover. When many shorts are trapped at once - high short interest relative to available shares - that covering becomes a stampede.
Short squeeze vs gamma squeeze
They are cousins, often confused. A short squeeze is forced buying by short sellers. A gamma squeeze is forced buying by options dealers hedging call exposure. They frequently stack: heavy call buying triggers dealer hedging, which lifts price, which squeezes shorts, which lifts price further. Two engines, same direction.
In a squeeze, the buyers aren't bullish - they're trapped. That's why it ends as fast as it starts.
Why squeezes reverse hard
Squeeze rallies are built on forced flows, not organic demand. Once the shorts are covered and the dealers are hedged, the buying pressure vanishes - and there is nothing underneath. That is why parabolic squeezes tend to give back the move violently. Understanding what is driving a move tells you how durable it is.