Short-sellers scrambling for cover sent shares of Volkswagen AG (OTC ADR: VLKAY) rocketing up more than $1,000 each yesterday (Tuesday), to briefly give the German automaker the most valuable market capitalization in the world.

Volkswagen’s Frankfurt-traded shares soared as high as $1,258 (1,005 euros) before closing at $1,186 (918 euros) yesterday.

On Monday, Porsche SE (PINK: POAHF) announced it had acquired options on 31.5% of Volkswagen’s stock, in addition to the 42.6% direct stake it already controlled. With the German state of Lower Saxony controlling another 20.2% of Volkswagen stock, that left a very small amount of shares available for short-sellers who had bet on a decline in Volkswagen’s share price – given the poor outlook for the global auto industry – to cover their “short” positions.

“We’re getting a sense of the Sturm und Drang in the markets now,” Michael Holland, the manager of Holland & Co., an investment management firm, told the International Herald Tribune. “When you get into panicked markets as we’ve had in the past few months, you get these vicious moves which happen on the downside and then to the opposite direction. It’s incredible to watch.”

The result was a zooming share price for Volkswagen as hedge funds and other institutional investors bought up shares to cover shorted positions.

Porsche announced today (Wednesday) that it would settle as much as 5% of the derivative contract that make up its indirect stake to increase the supply of VW shares in the marketplace and alleviate some of the pressure on short-sellers. That 5% stake has increased in value by $13.8 billion in the first two days of trading this week, Bloomberg reported.

“Porsche SE intends – depending on the state of the market – to settle hedging transactions in the amount of up to 5.0% of the Volkswagen ordinary shares,” the company said in a statement.

The move sent Porsche shares up as much as 43%, as it investors began to realize that the Stuttgart-based luxury carmaker stands to make a sizable profit from Volkswagen’s recent share movements.

“Porsche has many opportunities with their options,” Robert Heberger, an analyst with Merck Finck, told Forbes. “They could just cash in the money without buying the shares, and this would give them billions of gains with their options, which they can hold in cash.”

But some analysts have accused Porsche of manipulating the market to its advantage.

“Porsche has acted irresponsibly and that has damaged capital markets considerably,” Henning Gebhardt, who helps manage the equivalent of $220 billion at DWS Investment GmbH in Frankfurt, told Bloomberg News. “Porsche snuck up on Volkswagen. They knew about the short sellers, and it must have been clear to them that there would be a massive short squeeze.”

The volatile price swings caused the Frankfurt Stock Exchange to reduce Volkswagen’s weighting in the German blue-chip stock DAX Index to 10% from 27%. That move caused the share price to drop, as asset managers sell Volkswagen shares to rebalance indexed-portfolios.

Volkswagen shares closed Friday at $271.21 (210.52 euros).

Volkswagen is best-known as the producer of the hugely successful VW Beetle – which was a huge commercial winner, with more than 20 million vehicles sold, and which also became a cultural icon during the Flower-Power era of the 1960s and the gas-line-era of the 1970s. Porsche has developed such winning sports cars as the 356, the 911 and the Turbo Carrera.

The 356 hasn’t been built for more than four decades and yet still has an international following spearheaded by a special club.

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