To squid someone is to call one out on either a moronic or unfunny joke, or a moronic or unfunny act. First, Friend A makes a statement, next Friend B tries to call Friend A out with something he assumed was funny, but was actually dimwitted. So you begin the gesture of tapping knuckles with Friend B to make him excited about his presumed funny joke. Exactly before the contact is made between Friend B's fist and yours, you drop all four fingers downward in a limp fashion and yell "Squid!"
Friend B realizes what he said or did was stupid and not funny and is subsequently embarrassed for his action.
Great for retaliation following a 'your mom's a...', 'your face is' and finally 'that's what he said.'
Friend A: "Can you pass me some more creamer for my coffee?"
Friend B: "How about I give you some man-cream instead?"
You: "Ha, I know, right?" Then you reach your fist out and before contact is made with Friend B, engage the squid formation. Then say, "Squid!"
Past tense: "You just got squided."