How to Read Short Interest and Work Out Days to Cover

Six million shares short. One and a half million shares traded on an average day. Divide the first by the second and you get four. That number, days to cover, is the most quoted thing traders do with short interest, and it takes about ten seconds to work out once you know where the inputs come from.

Short interest itself is simpler. It is the count of shares sold short and not yet bought back. Every open short position in the stock, added together.

Where the number comes from

In the US, broker-dealers report their customers’ short positions to FINRA, which compiles the totals across firms and publishes them twice a month, so each stock gets two short interest readings in a typical month and nothing in between. Each report reflects positions as of a specific settlement date. The figures are released some days after that date.

So the number you read is already old. By the time a short interest figure reaches your screen, the positions it describes were measured a while back, and in a stock that has been moving hard the short side may have added, covered, or turned over completely since then, with nothing in the published figure to show it.

Check the date. Most places that show short interest also show the settlement date it belongs to.

Two ways to scale it

A raw share count means little alone. Four million shares short is heavy for one company. For another it is trivial. Traders scale it in two ways.

Percent of float compares short interest with the shares actually available to trade. Float leaves out shares held by insiders and other closely held blocks, so it is the right denominator for asking how much of the tradable supply is sold short.

Days to cover, also called the short ratio, compares short interest with trading volume. It asks how many average days of volume it would take for every short to buy back, if they did nothing else and the stock traded its usual amount.

The worked sums

Take a hypothetical stock with these figures.

The two percentages describe the same short position. Which one a page shows changes how crowded the stock looks. Read the label.

Days to cover moves with volume as well. If average daily volume drops to 750,000 while short interest holds at 6,000,000, days to cover doubles to 8.0 without a single new share being shorted. The averaging window matters too. Data providers use different ones, so two sites can print different ratios from identical short interest, and neither is wrong, since each is simply dividing by a different measure of normal volume.

Reading the change between reports

One report is a snapshot. Two in a row start to say something.

If short interest climbs from one report to the next while the price rises, shorts are adding into strength. If it falls while the price rises, some of that rise may have been covering. Neither reading is certain, because the positions behind each figure were measured on different dates and a great deal of trading happens between them that the published totals never capture.

What it can and cannot tell you

High short interest tells you positioning is crowded. A lot of traders hold the same bet. If the stock rises against them, their buying to cover adds fuel. A high days-to-cover figure says that exit would take a while at normal volume.

That is all it says. It gives you no timing. A heavily shorted stock can keep falling for months. That is what its short sellers expected. A lightly shorted one can squeeze on news. Crowded positioning raises the stakes of a move without telling you when, or whether, the move comes.

Short interest also tends to travel with borrowing costs, because heavy demand to borrow can make a stock hard to borrow, with a daily fee that rises as supply runs short.

If you are thinking of taking the short side yourself, the mechanics go well beyond this number, and short selling is a separate skill with its own costs and its own rules.