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Cramer: Short Selling Doomed Netflix

But the supply of stock outstanding that's needed to locate shares to sell short wasn't expanding at all. In fact, it was contracting because of Netflix's buyback.

So, shorts kept shorting and trying to borrow stock and they couldn't locate it.

When you can't locate stock you are forced to cover or buy back shares. When you saw the stock skyrocket from $50 to nearly $300, some of that demand was from natural buyers. But much more was from buyers who were forced to cover. In an amazing confluence, just at the height of when shorts were being forced to cover like mad, Netflix committed its now legendary screw up.

The longs panicked, but more importantly the shorts who would normally cushion the blow with their buying had been wiped out by the rise. The result? No floor. None. Without growth, with a shrinking subscriber base and with no natural covering short sellers what happens?

You got this astounding collapse from a level that it should never have been. You want to know why Netflix soared? Blame the short selling process. You want to know why it collapsed? Blame management, for certain. You want to know why it fell with such velocity? That's what happens when a stock gets squeezed up to the point that there's no one left to cover.

At the time of publication, Cramer had no position in any of the securities mentioned.
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