A mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market
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What is the Short Interest Ratio?
The short interest ratio is a mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market.
Summary
- The short interest ratio is a mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market.
- The ratio is calculated by dividing the total number of shorted shares of a stock by the average daily trading volume.
- When the short interest ratio is high, the number of shares that will be repurchased in the open market after short selling is high, and similarly, if the short interest ratio is low, it means that the number of shares that will be repurchased in the open market after short selling is low.
How to Calculate the Short Interest Ratio
The short interest ratio is calculated by dividing the total number of shorted shares of a stock by the average daily trading volume (ADTV). To put it in a formula:
What Does the Short Interest Ratio Imply?
The short interest ratio is a mathematical indicator in finance. It depends on two factors – short interest and average daily trading volume. It ultimately indicates whether it is the right time to short sell.
When the ADTV is high, the short interest ratio is low. When the ADTV is low, the short interest ratio is high. Similarly, when the total short interest is high, the ratio is high, and when the total short interest is low, the ratio is low.
It indicates how high or how low the shorted shares are compared to the average daily trading volume. When the short interest ratio is high, the number of shares that will be repurchased in the open market after short selling is high. Similarly, if the short interest ratio is low, it means that the number of shares that will be repurchased in the open market after short selling is low.
What is the Days to Cover Ratio?
The short interest ratio is often used interchangeably in place of the days to cover ratio. The days to cover ratio is similar to the short interest ratio and measures the anticipated number of days to cover a position on the shorted shares issued by a company.
Therefore, the days to cover ratio basically represents the total number of days for short sellers to repurchase their borrowed shares from the open market.
Hence, when the days to cover ratio is high, it is a bearish indicator. Conversely, if the days to cover ratio is low, it is a bullish indicator.
Short Interest (SI) vs. Short Interest Ratio (SIR)
The short interest ratio is the ratio of short interest to the average daily trading volume. Short interest is a part of the short interest ratio but is not the same as the ratio. Short interest is the number of shares that are short sold divided by the total number of outstanding shares.
A key difference between them is that the short interest ratio takes liquidity into account since it considers the ADTV. On the other hand, short interest does not take the ADTV into account; hence, it does not account for the liquidity prevailing in the market in its calculation.
Related Readings
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FAQs
Short interest as a percentage of float below 10% indicates strong positive sentiment. Short interest as a percentage of float above 10% is fairly high, indicating significant pessimistic sentiment.
Is 20% short interest a lot? ›
What Is a High Short Interest Ratio? There are no hard and fast rules for this. However, a short interest as a percentage of float above 20% is generally considered high, which could indicate significant negative sentiment.
Is 2% short interest high? ›
Short interest can vary quite a bit between industries, but in general, between 10% and 20% is considered relatively high, and anything above 20% is considered very high. Anything under 10% is considered normal. Short interest below 2% indicates that the market is broadly optimistic about a stock's near-term prospects.
How much short interest is needed for a squeeze? ›
High short interest in a stock may lead to a short squeeze. Short interest is considered “high” when it rises above the 20% mark. The higher it rises, the more susceptible it becomes for a squeeze. For example, a stock with a 57% short interest is more likely to squeeze than a stock with a 22% short interest.
How do you tell if a stock is heavily shorted? ›
Search for the stock, click on the Statistics tab, and scroll down to Share Statistics, where you'll find the key information about shorting, including the number of short shares for the company as well as the short ratio.
Is 10% short interest a lot? ›
Most stocks have a small amount of short interest, usually in the single digits. The higher that percentage, the greater the bearish sentiment may be around that stock. If the short % of the float reaches 10% or higher, that could be a warning sign.
What is considered a low short interest? ›
The Stock Screener on schwab.com includes a short interest screener to scan for stocks with various levels of short interest relative to their total shares available for trading or the stock's "float." A stock with less than 10% of shares in the hands of short sellers might be viewed as having relatively low short ...
What was the short interest on GameStop? ›
At that time, GameStop's “short interest,” aka the number of shares sold short relative to its total public float, was a staggering 140%, meaning some shares had been shorted more than once. Today, short interest is just 24% — firmly in negative sentiment territory, but nowhere near the absurd levels of January 2021.
How to analyze short squeeze? ›
The best way to identify short squeeze candidates is to look at the number of shares short relative to a stock's average daily trading volume. This is known as the days to cover ratio. Stocks with days to cover ratios of 5 or more may be susceptible to short squeezes.
Is it good to buy a stock with high short interest? ›
A high short-interest stock should be approached with extreme caution, but not necessarily avoided at all cost. Like all investors, short sellers aren't perfect and have been known to be wrong. Many contrarian investors use short interest as a tool to determine the direction of the market.
The average short interest for S&P 500 Health Care Index Sector ( XLV, which has a 12.12% weightage in the broader S&P 500 index, gained 1.38% in the last month, trailing behind the S&P 500 index's (SP500) gain of 3.81%.
How to avoid short squeeze? ›
How to Avoid a Short Squeeze
- Stay away from highly shorted stocks. Short squeezes occur when the trade becomes crowded. ...
- Keep your position sizes modest. ...
- If a trade moves against you, cut your losses early.
Short squeezes are typically triggered either by unexpected good news that drives a security's price sharply higher or simply by a gradual build-up of buying pressure that begins to outweigh the selling pressure in the market.
Is short squeeze illegal? ›
Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal. In addition, short sales used to manipulate the price of a stock are prohibited.
What is the short interest ratio for Tesla? ›
Tesla's Short Interest
However, there are approximately 83.84 million shares of Tesla being shorted. That represents roughly 3% of the company's float — a relatively low percentage. In the last 30 days, approximately 242,000 shares of Tesla have been shorted, amounting to $53.7 million.
Is a high short ratio bad? ›
A high short ratio might signal skepticism; a low ratio hints at optimism. A very high short ratio could set the stage for a short squeeze, a phenomenon where the stock price jumps as short sellers scramble to cover their positions in liquidation trades.
What is a good long short ratio? ›
Simply put, the long/short ratio of 1.8145 means that there are 1.8145 as many long positions as short positions. This would be considered a bullish signal.
