Melissa, a short squeeze occurs when there is a lot of short interest and the short sellers are forced to cover. Short sales require a margin account, so when the price of the stock begins to go up as the result of good news or analysts' upgrades the short sellers are forced to either increase the amount of cash they have in their account or to repurchase the shares they shorted. If there is a lot of short interest in a stock this can cause the price of the stock to rise substantially over a period of several days. Thus, you will see short interest reported in days by dividing the short interest by the average daily volume. However, for a share to change hands on the NASD there are two transactions: one from the seller to the market maker, and a second from the market maker to the buyer. The latest figures for PSFT as reported by NASD is a short interest of 5,006,131 shares, and an average daily volume of 1,512,224. Dividing those two numbers and multiplying the result by 2 gives the short interest in days. For PSFT as of August 15 this is 6.62 days.
A short squeeze occured with PSFT in April, when the stock rose by about 20% in 1 day! Typically, following a short squeeze, the share price will drop substantially (although not back to it's starting point!). Therefore, if you see a short squeeze occuring (look for much higher than normal volume and a very rapid rise in the share price) you might consider selling your calls, and buying them back when the price settles back down somewhat.
Hope this helps,
Paul
PS we got another analyst buy rating today. |
