Rarebird: Rarebird: How many days to cover?
Short interest is simply the total number of shares of a company that have been sold short. The Fool believes that the best shorts are those with low short interest. They present the maximum chance for price depreciation as few short sales have occurred, driving down the price. Also, low short interest stocks are less susceptible to short squeezes
The significance of short interest is relative. If a company has 100 million shares outstanding and trades 6 million shares a day, a short interest of 3 million shares is probably not significant (depending on how many shares are closely held). But a short interest of 3 million for a company with 10 million shares outstanding trading only 100,000 shares a day is quite high.
Days to cover is a function of how many shares of a particular company have been sold short. It is calculated by dividing the number of shares sold short by the average daily trading volume. For example: one million shares of an issue have been sold short, it has an average trading volume of 25,000. The days to cover is 1,000,000/25,000, or 40 days.
When you short a stock, you want the days to cover to be low, say around 7 days or so. This will make the shares less subject to a short squeeze, the nightmare of shorters in which someone starts buying up the shares and driving up the share price. This induces shorters to buy back their shares, which also drives up the price! A short days to cover means the short interest can be eliminated quickly, preventing a short squeeze from working very well.
Also, a lengthy days to cover means that many people have already sold short the stock, making a further decline less likely. When a number of short sellers all try to "cover" their short at the same time, that does indeed drive the stock up.
The approach then when shorting is therefore to avoid in general stocks that already have a fairly hefty amount of existing short sales thus looking to never get squeezed.
good luck c-ya! |
