What Is Short Interest?

What Is Short Interest?

Let me explain short interest directly: it's the total number of shares of a stock that investors have sold short but haven't covered yet. You often see it as a percentage of the stock's total outstanding shares.

When traders expect a stock's price to drop, they borrow shares from their broker and sell them. If the price falls, they buy back cheaper and return them, pocketing the difference. In essence, short interest shows how many people are betting against the stock. If it rises, more investors are turning bearish; if it falls, they're getting bullish.

You'll find short interest reported as a number or percentage, and I'll cover how you can use it in trading, plus why it matters to the market and regulators.

Key Takeaways

Short interest tells you how many shares are shorted and open. It's useful as a percentage. Rising short interest means more bearish views, while falling means more bullish. It gauges sentiment for a stock or the whole market, and some use it to decide if shorting is worthwhile.

Understanding Short Selling

Before diving into short interest, let's review short selling. It's a strategy where you borrow shares you think will lose value, sell them now, and buy back later at a lower price to return them.

People often criticize it because you're betting against companies that employ folks, but it's a standard hedge for both big institutions and everyday traders.

Here's the process: Spot an overvalued stock. Borrow shares from your broker, pay a fee. Sell them at current price. If it drops, buy back cheap, return them, and keep the profit minus costs.

For instance, short 100 shares at $50, price falls to $40, buy back for $4,000, profit $1,000 after fees. But it's risky—stocks can rise forever, leading to big losses, so it's for experienced traders.

What Does Short Interest Signal?

Short interest helps predict a stock's direction or overall market mood. Exchanges report it monthly, giving you a benchmark for shorting.

A big jump, say from 10% to 20%, warns of growing negativity. You can turn it into a ratio—days to cover—by dividing short shares by average daily volume. That shows how many days shorts need to buy back.

Example: 1 million short shares, 100,000 daily volume, that's 10 days to cover.

How Is Short Interest Determined for a Company?

Exchanges report short interest biweekly; check financial sites or FINRA. Calculate percentage: (short shares / total outstanding) x 100.

Short Interest Ratio

This ratio checks short-selling levels for price potential. Formula: short shares / average daily volume. It indicates days to cover, revealing sentiment and volatility risk.

Days to Cover

People use this interchangeably with short interest ratio—same formula.

How To Use Short Interest

Rising short interest means many are betting on a drop, but it doesn't guarantee one. Calculate short float: short shares / float shares.

Example: 1 million short on 10 million float is 10%. It shows market sentiment, and high levels can be buy signals for bulls. But drawbacks exist—reports are monthly, outdated, and stocks can stay shorted without squeezing or dropping.

Examples of Short Interest Ratio

Take Tesla in early 2020: As its price surged, shorts piled in, making it the most shorted. Days to cover rose, but when the market dipped, shorts lost billions covering.

Later, C3.ai in 2023 saw shorts jump from 9.2% to 38.2% of float, with days to cover at 6.86, risking a squeeze and causing volatility into 2024.

In the S&P 500, high short interest like for KMX signals bearishness and squeeze potential, while low like TFX shows confidence and less volatility. Both have ample float for trading.

FINRA's Short Interest Reporting Requirements

FINRA requires firms to report shorts twice monthly by 6 p.m. ET on the second business day after settlement, for transparency and monitoring.

What are the Drawbacks of Using Short Interest for Trading?

Don't rely on it alone—extremes might not cause quick price changes, and stocks can linger at highs. Reports are monthly, so data's old, and actual interest could differ.

What Is a Short Squeeze?

It's when shorts rush to buy back, driving prices up, forcing more buying in a cycle.

How Does Short Interest Compare to the Put/Call Ratio?

Both show sentiment: short interest via open shorts, put/call via options—puts are bearish, calls bullish.

What Is a Good Short Interest?

Below 10% of float means positive sentiment; above is pessimistic, over 20% very high.

The Bottom Line

Short interest counts open shorts, best as a percentage. Rising means more bearish, falling more bullish. Use it for sentiment on stocks or markets, and as a shorting signal.