Understanding the Gakong Phenomenon: Mastering the Key to Short Selling Risks

1. What does “Gao Kong” mean?

Gao Kong (Short Squeeze), also known as “short squeeze,” refers to the rapid rise in the price of an asset that has been heavily shorted, forcing short investors to close their positions at prices higher than expected, which further accelerates the price increase. In simple terms, Gao Kong means that the bears are “forced to cover.”

This process generally occurs in two common scenarios: one is an unexpected rebound in stock price, causing short sellers to buy back at high prices to cut losses; the other is a group with strong capital deliberately pushing up the stock price to force out short positions and profit from the movement.

Three ways to short

To understand why Gao Kong occurs, first understand how short selling works:

Borrowing stocks to short: Borrowing shares from long-term holders in the market, paying interest, then selling. When the stock price drops, buy back to return the shares, earning the price difference.

Futures contracts: Paying margin to short a specific underlying asset, but needing to roll over before expiration and facing forced liquidation risks.

CFD contracts: Paying margin to short, without the need to roll over, but requiring constant monitoring of margin levels. Sharp rises in stock price can trigger margin calls.

Regardless of the method, when stock prices keep rising, all short sellers face margin shortfalls. If the rise is rapid, brokerages will forcibly close positions, which is also why Gao Kong can reinforce itself—short covering pushes the price even higher.

2. Why does Gao Kong happen?

The emergence of a short squeeze is not accidental; it is triggered by specific market conditions.

Speculative capital actively targets

When an asset is deemed overvalued by institutional investors, speculative funds start borrowing shares to short. These short positions are disclosed to the market. If a stock’s short interest exceeds 50% of circulating shares, it becomes a prime target for a short squeeze.

For example, in the 2021 GME Gao Kong event, this game retailer had been losing money for years, and Wall Street institutions heavily shorted it. But GME’s market cap was small, and liquidity limited, with short interest reaching 140% of total shares.

When the Reddit community WSB launched a coordinated buying campaign, the stock price skyrocketed from $30 to $483 within two weeks. Short sellers, due to margin calls, were forced to cover, incurring reported losses over $5 billion. The stock then plummeted more than 80%, demonstrating the volatility characteristic of Gao Kong.

Fundamentals improve, triggering natural buying

Tesla exemplifies another driver of short squeeze. This electric vehicle company had been losing money for years, making it a target for shorts. But after turning profitable in 2020 and with Shanghai factory revenue surging, the stock began to rally. In just half a year, the price rose from 350 yuan to 2318 yuan, and after a stock split, it exceeded 1000 yuan within a year. In two years, the increase approached 20 times. Although this rally was driven by fundamental improvements, shorts who missed out faced huge losses.

3. What should you do when encountering Gao Kong?

There is a saying in short investing: “Safety first when exiting.” The maximum profit for shorts is when the asset drops to zero, but losses are unlimited. Once Gao Kong triggers, losses can multiply many times over.

How to respond when short interest is high

When a stock’s short interest exceeds 50% of circulating shares, even if the price remains weak, it’s wise to reduce positions early. Observe the RSI indicator:

• RSI between 50 and 80: Bulls are dominant; market favors long positions
• RSI between 20 and 50: Bears are dominant; market favors short positions
• RSI below 20: Oversold condition; price reversal likely, exit promptly to avoid being squeezed

Small gains or losses are acceptable; the key is to avoid getting trapped in Gao Kong.

How to participate in Gao Kong

Some investors actively chase stocks with high short interest, trying to profit from the squeeze. In this case, closely monitor short interest changes—if short positions keep increasing, it can further push the price up; if signs of short covering appear, take profits immediately.

Because this buying activity is essentially “covering buying,” not a genuine confidence in the company’s fundamentals. Once the Gao Kong ends, the stock price will quickly fall back to reasonable levels, and late buyers risk being trapped.

4. How to profit smoothly from short selling?

Gao Kong generally requires two conditions: excessive short interest + high market attention. The way to avoid being caught in a squeeze is to steer clear of such environments.

Stock selection: Major indices or large-cap stocks with high liquidity are less likely to have excessive short interest, making them relatively safer.

Timing: In a bearish market, wait for a rebound before shorting, rather than chasing after falling prices blindly.

Tools: Compared to borrowing stocks for shorting, which risks forced liquidation, using CFD contracts is more suitable because investors can control leverage ratios independently.

Hedging: Simultaneously establish long positions on individual stocks and short positions on the broader market in a 1:1 ratio. As long as the stock outperforms the market or declines less than the market, profits are realized, reducing single-sided risk.

5. Key tips

For short investors, Gao Kong is the most powerful risk. Besides closely monitoring order book positions and technical indicators, it’s crucial to pay attention to company fundamentals and major news. A single positive announcement can ruin years of strategic planning.

Profitable short selling requires discipline and caution, more so than going long. Understanding how Gao Kong works, avoiding high-risk environments, and setting clear stop-loss points are essential for long-term survival in short trading.