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There are a few ways to find stocks that may be experiencing or about to experience a short squeeze. If the short seller doesn't buy shares to cover, they could get hit with a margin call, which forces them to purchase shares or add funds to their account to cover the losses. Multiply this by the number of shares shorted, and the loss increases significantly. Assuming they buy at $25, they return the borrowed shares for $5 and realize a loss of $20 per share.

They now must either hold out and hope the stock price comes back down quickly, or they need to buy shares at this level to stop losing additional money. Let’s say the short seller borrowed AMC shares at $5 per share, and the stock rallied to $25 per share. Let’s go back to the AMC example to illustrate this.

Because stock prices can go infinitely higher and the sellers must buy them at the market price to pay back the shares of stock they don’t own, there is no maximum limit on the loss a short seller can realize. A short squeeze happens when the stock price rises significantly, and the short seller has to buy back shares at a higher price.