It’s unknown (OED).
While some nieces (ages 6 and 4) were talking to me about “The Little Mermaid,” they mentioned the octopus, to which I dutifully told them that what the word actually meant.
Then I told them about another sea critter called the squid, which had ten arms, not just eight.
One then asked “What does ‘squid’ mean?”
I was stumped.
I didn’t know.
So I went digging. I found that the origin is unknown–that “squid” first appeared in 1613. Before that, they were called “cuttlefish.”
OK, so what does “cuttlefish” mean?
Guess what–it’s unknown, too (also, OED).
End of search.
My own WAGs (i.e., I have absolutely NO evidence for it) about “squid” and “cuttlefish:”
“Squid” is related to “squishy” or “squirt.” One of the other names for “squid” was “ink-fish,” so “squirt” is a way to describe both what they do with ink, and what they do with water as they propel themselves thru it. Their texture is somewhat “squishy,” so you have a “squishy, squirting” “fish.”
“Cuttlefish,” I think, is possibly related to an old word for “knife,” probably describing the “bone” that gives squids support. (Yeah, yeah, I know it’s not literally a “bone.”) The Spanish word for “squid” (“calamar”) owes its origins to the Latin word for “reed,” also, probably because of the bone.
OK, just some pointless, mundane amateur word spelunking I thought I’d share.