Tuesday, May 31, 2011

Short Interest

Nicole Wachs from TradeKing
For a crash course, short selling is when a trader borrows shares from his/her broker and sells them on the market without ever owning the stock. The investor or trader’s aim is to replace the shares for less cost than the price at which they were borrowed and make a profit. If the price increases, however, you’ll be exposed to potentially unlimited losses, so please approach short selling with caution. 

Found an interesting link today. It shows the largest short interest on the NYSE.
The first thing that caught my eye was that the first 4 entry were Preferred Shares. I didn't know you could short preferred stocks. I'll have to check that out.
RankCompany NameSymbol % Short Interest Short Interest
1First Industrial Realty Trust Inc. Dep Pfd. (Rep. 1/10,000 of a share of 7.25% Cum. Redeem. Pfd. Series J)FR.PJ2947.33%17,684
2First Industrial Realty Trust Inc. Dep Shs (Rep 1/10,000 of a share of 7.25% Cum Redeem Pfd Series K)FR.PK2689.5%5,379
3Apache Corp. Dep Shs (Rep 1/20th Interest in a share of 6.00% Mand. Conv. Pfd. Ser D)APA.PD92.46%1,169,611
4Hartford Financial Services Group Inc. Dep Shs (Rep 7.25% Mandatory Conv Pfd Ser F)HIG.PA72.92%419,264

TheStreet.com has put it this way:
    The short interest in a stock, a widely available statistic, represents the total number of shares that have been sold short and not yet repurchased. This raw number won't tell you much on its own. Instead, you need to look at short interest as a percentage of the stock's float, or the number of shares that are actively tradable in the market. This statistic will let you compare one stock's short interest with that of others.
I was trying to investigate what would be considered an excessive short interest percentage. Wow! I think the rule of thumb is if its more than 10% short interest then it is considered  to have a large contingency of short sellers.

It got me thinking, though. If you had two stocks with a 10% short interest. [ 5M / 50M = 10% short interest ]  Isn't "days to cover" a more accurate measure of  bearish sentiment?

If  you had two identical equities with 10% short interest. The first stock with 50M float and an average volume of  1M / day,  5M in short interest, therefore 5 days to cover. The second stock with 50M float and an average volume of 250K / day,  5M in short interest, therefore 20 days to cover. A higher number would indicate it would be harder to unwind your position.

"Investopedia indicates a bullish guideline for the short interest ratio is eight days. Wikipedia’s bullish rule of thumb is lower, about five days; A number around three is noted as bearish"

 Could it be possible to have a stock that is under the 10% short interest and yet have a larger "days to cover" number than one high on the short interest list?

Using the FINVIZ screener and sorting by short ratio, with stock that have 300K AverageVolume, the stocks with "days to cover" larger than 10 compromise 10% of the listings.

One refinement to the screen would be to use $Volume [price * volume] to assure that no manipulation is occurring. This will give you a rough average number of trades generating the volume listed. If its 10 trades a day, you know that someone could possibly  be pumping the stock. My rule of thumb on $Volume is >6M, but your risk level could allow for a lower combination. That would allow for the following:
  • $1 stock with 6M average volume
  • $10.00 stock with 600K average volume
  • $100.00 stock with 60K average volume
Or just adjust the price to your comfort level, i.e. stocks > $5.00.

Found a website which combines the two metrics -
    "Finally, I like to combine both days-to-cover and percentage-short in one metric, where the product of the two gives us a number that "combines" both metrics equally. That is, the higher the number the highest the combination of both metrics together where both are equally important."
%Short * Days to Cover > ?
What would be the rule of thumb inflection point?

A  short squeeze occurs when a stock that has been shorted by many investors rises. More and more short-sellers start buying shares to cover their positions, driving up the stock price.

No comments:

Post a Comment