This article is from Sahil Bloom which contains a lot of insights, if you find it helpful please give him a follow.

If you follow financial markets (or if you watch Billions), you've heard the phrase "short squeeze" used quite frequently. But what is a "short squeeze" and how does it work?

"Short interest" is a measure of how heavily an asset is shorted by the market. It is the total number of shares that have been sold short (borrowed and sold), but have not yet been covered (bought and returned). It is usually measured as a % of the # of shares outstanding.

A "short squeeze" occurs when a heavily-shorted asset experiences a rapid upward price movement. When this happens, short sellers may be forced to close their short positions (i.e. buy the stock and return it to the broker), further accelerating the upward price movement.

Let's look at a simple example to show this in action. We will use Tesla, one of the most heavily-shorted stocks in the world. Imagine the stock price is $1,000 per share. This seems crazy. Ricky Rational decides to short the stock at this level.

Ricky borrows 1 share from his broker, agreeing to return the borrowed share in the future. He sells it short at $1,000. If the price declines, great. He is now able to buy a share at $800. Ricky returns that share to his broker and closes his short with a $200 profit!

If the price rises, not so great. His broker gets nervous about his ability to pay and forces him to replace the borrowed share. He buys a share at $1,200 and closes the short in a loss. In both cases, the "closing" of the short requires a purchase of shares of the stock.

Therein lies the makings of the short squeeze! If Tesla stock rises rapidly (which it does far too often), Ricky and many others may all be forced to close their shorts at once. This creates a surge of buying (to return the borrowed shares) and drives the price up further.

Short sellers are literally squeezed out of the market. You can track short interest in specific stocks to determine when one may be occurring. So next time you see a chart that shows a sharp rise, followed by another, even sharper rise, you may be seeing a short squeeze.

Futures are a common form of derivatives.

A futures contract is an agreement to buy or sell a specific amount of an asset at a specific price on a specific future date. Whereas an option gives the holder THE RIGHT to buy or sell an asset, futures are AN OBLIGATION.

A few key terms in futures:

Tick Size: Minimum price fluctuation of contract

Contract Size: Quantity of asset in one contract

Notional Value: Contract Size * Underlying Asset Price

Delivery: Either financially settled (with cash) or physically settled (goods delivered)

When and why are they used? Futures have two key use cases:

- Hedging

- Speculation

Let's use simple examples to look at each of them.

First, hedging. Imagine you are a rice farmer. You sell your rice to Happy Fish Sushi, a chain of sushi restaurants. If rice prices rise, that is good for you, but bad for Happy Fish. If prices fall, the opposite is true.

Both you and Happy Fish want to plan your business and limit your exposure to movements in the price of rice. So you make an agreement. You will sell (and they will buy) a set amount of rice at a fixed price on the 1st day of the month. This is a futures contract!

Now, whether the price of rice rises or falls, you know how much you will be selling your rice for and Happy Fish knows how much they will be buying their rice for. This is a simple example of how futures may be used to allow businesses to hedge - i.e. limit - risk.

Next, speculation. Another very simple example. Say I am bullish on gold prices. I think the price should be $3,000+ per ounce, but see the September futures contract is at $2,500. I buy one contract. September arrives and the price of gold is $3,500, just as I predicted.

My futures contract obliges me to buy at $2,500 per ounce, but I can sell at $3,500 per ounce. I can either (a) take delivery of the gold and sell it or (b) sell the futures contract to someone who will. I used futures to speculate on a price movement (and profited from it).

Highly-traded futures markets include commodities, stock indexes, currencies, interest rates, and precious metals. Trading in futures typically requires a margin account, which entails real risks.

So those are the (very) basics on futures.

In 1822, a Scottish military general named Gregor MacGregor made a fortune selling settlers and investors on the dream of a new South American paradise. The only problem? It was all an elaborate lie.

General Gregor MacGregor was in need of a new adventure. The former British Army officer had become a mercenary, fighting on behalf of Venezuela and New Granada in their struggles for independence against the Spanish. He was not an idealist. He only sought one thing. Glory.

After Venezuela was liberated from Spanish rule, MacGregor led various private campaigns in Latin America. In 1820, he landed on the Mosquito Coast, a 200-mile stretch of coastline on the Caribbean side of modern day Nicaragua and Honduras. Here, he would find his glory.

The land was visually pleasing, but completely inhospitable and unfit for cultivation. But those details wouldn't stop MacGregor! He negotiated with the local king and acquired 8 million acres in exchange for rum and jewelry. He gave the new land an exotic name: Poyais.

Then, the elaborate scheme began. MacGregor arrived back in London in 1821 and started spreading the word of his tropical paradise. He referred to himself as the "Cazique" (Spanish-American word for Chief or Prince) of Poyais. The Poyais Scheme was officially in motion.

MacGregor began to seek investors and settlers. He opened offices across the UK, sharing fake documents and images to inspire confidence in the perfection of this new land. He even published a book on Poyais under a fake name to imbue confidence

It was time to profit from the scheme. MacGregor offered Poyaisian land certificates to settlers and investors, raising their price by almost 100% as demand surged. 500+ individuals purchased Poyaisian land, including many who invested all of their savings.

But MacGregor was not done yet. He issued £200K in Poyaisian bonds (~£25M today) backed by the (non-existent!) revenues of the Poyaisian government. The 6% yield was attractive during a period in which British government bond yields had fallen below 3%. Investors went wild.

In 1822, the first ship filled with Poyaisian settlers set sail from London. MacGregor, never satisfied, hit them with one last scam, trading them worthless Bank of Poyais Dollars (printed in Scotland) for their remaining British pounds. With that, he bid them farewell.

Upon arrival in Poyais, the settlers, many of whom had worn their best outfits for the landing, quickly realized they had been deceived. To make matters worse, shortly after arrival, a hurricane blew through the region, destroying their ships.

A combination of inhospitable land and local diseases (yellow fever and malaria) would take its toll on the settlers. Of the ~250 settlers who would arrive in Poyais across seven voyages, just ~50 would survive. All the while, Gregor MacGregor counted his money in London.

But, like most good fraudsters, Gregor MacGregor was relentless. By the time a few survivors returned to London and told the story of their ordeal, he was already in France, peddling Poyais on more unsuspecting settlers and investors.

Incredibly, MacGregor would never be held accountable for the elaborate (and deadly!) fraud. He was eventually arrested in France but acquitted after prosecutors failed to prove intent. After a few more schemes, he moved to Venezuela, where he died at his home in 1845.

The story of Gregor MacGregor's Poyais Scheme is an incredible one. It should serve as a cautionary tale for investors. If something seems too good to be true, it probably is. I hope you enjoyed this story as much as I did. Stay tuned for more!

This article is from Sahil Bloom which contains a lot of insights, if you find it helpful please give him a follow.

This article is from Sahil Bloom which contains a lot of insights, if you find it helpful please give him a follow.

If you follow financial markets (or if you watch Billions), you've heard the phrase "short squeeze" used quite frequently. But what is a "short squeeze" and how does it work?

"Short interest" is a measure of how heavily an asset is shorted by the market. It is the total number of shares that have been sold short (borrowed and sold), but have not yet been covered (bought and returned). It is usually measured as a % of the # of shares outstanding.

A "short squeeze" occurs when a heavily-shorted asset experiences a rapid upward price movement. When this happens, short sellers may be forced to close their short positions (i.e. buy the stock and return it to the broker), further accelerating the upward price movement.

Let's look at a simple example to show this in action. We will use Tesla, one of the most heavily-shorted stocks in the world. Imagine the stock price is $1,000 per share. This seems crazy. Ricky Rational decides to short the stock at this level.

Ricky borrows 1 share from his broker, agreeing to return the borrowed share in the future. He sells it short at $1,000. If the price declines, great. He is now able to buy a share at $800. Ricky returns that share to his broker and closes his short with a $200 profit!

If the price rises, not so great. His broker gets nervous about his ability to pay and forces him to replace the borrowed share. He buys a share at $1,200 and closes the short in a loss. In both cases, the "closing" of the short requires a purchase of shares of the stock.

Therein lies the makings of the short squeeze! If Tesla stock rises rapidly (which it does far too often), Ricky and many others may all be forced to close their shorts at once. This creates a surge of buying (to return the borrowed shares) and drives the price up further.

Short sellers are literally squeezed out of the market. You can track short interest in specific stocks to determine when one may be occurring. So next time you see a chart that shows a sharp rise, followed by another, even sharper rise, you may be seeing a short squeeze.

Futures are a common form of derivatives.

A futures contract is an agreement to buy or sell a specific amount of an asset at a specific price on a specific future date. Whereas an option gives the holder THE RIGHT to buy or sell an asset, futures are AN OBLIGATION.

A few key terms in futures:

Tick Size: Minimum price fluctuation of contract

Contract Size: Quantity of asset in one contract

Notional Value: Contract Size * Underlying Asset Price

Delivery: Either financially settled (with cash) or physically settled (goods delivered)

When and why are they used? Futures have two key use cases:

- Hedging

- Speculation

Let's use simple examples to look at each of them.

First, hedging. Imagine you are a rice farmer. You sell your rice to Happy Fish Sushi, a chain of sushi restaurants. If rice prices rise, that is good for you, but bad for Happy Fish. If prices fall, the opposite is true.

Both you and Happy Fish want to plan your business and limit your exposure to movements in the price of rice. So you make an agreement. You will sell (and they will buy) a set amount of rice at a fixed price on the 1st day of the month. This is a futures contract!

Now, whether the price of rice rises or falls, you know how much you will be selling your rice for and Happy Fish knows how much they will be buying their rice for. This is a simple example of how futures may be used to allow businesses to hedge - i.e. limit - risk.

Next, speculation. Another very simple example. Say I am bullish on gold prices. I think the price should be $3,000+ per ounce, but see the September futures contract is at $2,500. I buy one contract. September arrives and the price of gold is $3,500, just as I predicted.

My futures contract obliges me to buy at $2,500 per ounce, but I can sell at $3,500 per ounce. I can either (a) take delivery of the gold and sell it or (b) sell the futures contract to someone who will. I used futures to speculate on a price movement (and profited from it).

Highly-traded futures markets include commodities, stock indexes, currencies, interest rates, and precious metals. Trading in futures typically requires a margin account, which entails real risks.

So those are the (very) basics on futures.

In 1822, a Scottish military general named Gregor MacGregor made a fortune selling settlers and investors on the dream of a new South American paradise. The only problem? It was all an elaborate lie.

General Gregor MacGregor was in need of a new adventure. The former British Army officer had become a mercenary, fighting on behalf of Venezuela and New Granada in their struggles for independence against the Spanish. He was not an idealist. He only sought one thing. Glory.

After Venezuela was liberated from Spanish rule, MacGregor led various private campaigns in Latin America. In 1820, he landed on the Mosquito Coast, a 200-mile stretch of coastline on the Caribbean side of modern day Nicaragua and Honduras. Here, he would find his glory.

The land was visually pleasing, but completely inhospitable and unfit for cultivation. But those details wouldn't stop MacGregor! He negotiated with the local king and acquired 8 million acres in exchange for rum and jewelry. He gave the new land an exotic name: Poyais.

Then, the elaborate scheme began. MacGregor arrived back in London in 1821 and started spreading the word of his tropical paradise. He referred to himself as the "Cazique" (Spanish-American word for Chief or Prince) of Poyais. The Poyais Scheme was officially in motion.

MacGregor began to seek investors and settlers. He opened offices across the UK, sharing fake documents and images to inspire confidence in the perfection of this new land. He even published a book on Poyais under a fake name to imbue confidence

It was time to profit from the scheme. MacGregor offered Poyaisian land certificates to settlers and investors, raising their price by almost 100% as demand surged. 500+ individuals purchased Poyaisian land, including many who invested all of their savings.

But MacGregor was not done yet. He issued £200K in Poyaisian bonds (~£25M today) backed by the (non-existent!) revenues of the Poyaisian government. The 6% yield was attractive during a period in which British government bond yields had fallen below 3%. Investors went wild.

In 1822, the first ship filled with Poyaisian settlers set sail from London. MacGregor, never satisfied, hit them with one last scam, trading them worthless Bank of Poyais Dollars (printed in Scotland) for their remaining British pounds. With that, he bid them farewell.

Upon arrival in Poyais, the settlers, many of whom had worn their best outfits for the landing, quickly realized they had been deceived. To make matters worse, shortly after arrival, a hurricane blew through the region, destroying their ships.

A combination of inhospitable land and local diseases (yellow fever and malaria) would take its toll on the settlers. Of the ~250 settlers who would arrive in Poyais across seven voyages, just ~50 would survive. All the while, Gregor MacGregor counted his money in London.

But, like most good fraudsters, Gregor MacGregor was relentless. By the time a few survivors returned to London and told the story of their ordeal, he was already in France, peddling Poyais on more unsuspecting settlers and investors.

Incredibly, MacGregor would never be held accountable for the elaborate (and deadly!) fraud. He was eventually arrested in France but acquitted after prosecutors failed to prove intent. After a few more schemes, he moved to Venezuela, where he died at his home in 1845.

The story of Gregor MacGregor's Poyais Scheme is an incredible one. It should serve as a cautionary tale for investors. If something seems too good to be true, it probably is. I hope you enjoyed this story as much as I did. Stay tuned for more!

This article is from Sahil Bloom which contains a lot of insights, if you find it helpful please give him a follow.