Short interest has been in retail traders’ sights ever since the GameStop Corp. (NYSE: GME) surge.
But it’s been in the sights of the SteadyTrade Team for WAY longer than that.
It’s been one of my favorite patterns for years. Find a heavily shorted stock in a hot sector with high volume and wait for the squeeze.
This is one of the reasons that so many on the SteadyTrade Team did so well when GME popped.
They’d put in the screen time and knew how to plan their entries and exits. They’d worked on their discipline and didn’t chase when they got stopped out.
I always say that the best time to plan a trade is either 20 years ago or right now. These traders put in the work to prepare for this kind of opportunity.
Because of that, they didn’t get smoked like a lot of others. Let’s get into the details…
Table of Contents
- 1 So, What Is Short Interest?
- 2 What Is Short Interest in Stocks?
- 3 How to Use Short Interest When Trading Stocks: Examples
- 4 What Can Short Interest Teach Us?
- 5 What Is the Short Interest Ratio?
- 6 Short Interest vs. Put-Call Ratio: What’s the Difference?
- 7 Limitations of Using Short Interest
- 8 What Are the Stocks With the Highest Short Interest Rates?
- 9 Short Interest Tracker
- 10 The Short Interest Conclusion
So, What Is Short Interest?
Short interest measures the percentage of a stock’s float that has been sold short but not yet covered. This means that these short sellers are still in the trade … and ripe to be squeezed if the price trends higher.
FINRA requires companies to report short interest twice a month. There’s also an eight-day lag there. Short-interest reporting is sometimes combined with surveys of trading pools for more accuracy.
For value investors, high short interest is traditionally a bearish sign. But for an increasing number of short-term traders, that isn’t the case.
Many now see short interest in a stock as an opportunity.
That’s because it takes shares away from a stock’s float, which is its supply. Even better for longs, it promises more demand if the price shoots higher. That’s when all these shorts scramble to cover their positions.
You should already know that there are two sides to the market: supply and demand. Knowing a stock’s short interest gives you an important clue to both.
What Is Short Interest in Stocks?
Short interest in stocks isn’t a bad thing … It’s just the other side of going long on a stock.
Heck, smart traders were shorting GME while they were battling the institutional shorts!
The problem comes when you get cocky about it.
“Me and all my bro’s made bank shorting all the EV’s in pre market, nah forget those red/green moves baby, you stick with me and I’ll teach you how to really trade! You’ll make single digit % and blow up your account twice a week but that’s how we party!!$SOLO $FUV $AYRO etc pic.twitter.com/whc647PZQh— Timothy C. Bohen (@tbohen) November 20, 2020
GME’s short interest was close to 140% of the public float when Redditors moved on it. It was ripe for a short squeeze.
But the banks are learning. If you look at the short interest data these days, you won’t find any stocks above 100%…
The most shorted stock in early May was the decidedly unsexy insurance stock Root, Inc. (NASDAQ: ROOT). Back in May, its short interest was over 50% … but also was the target of an SEC investigation.
And some of the newbies who got in on the WallStreetBets moves learned that stocks don’t just go up. Hopefully, more traders now know to pay attention to more than just short interest…
There’s a lot to look for in potential trades, from news catalysts to unusual volume to big price moves. Short interest is just one criterion…
If you want to know what I look for in a stock, tune into my Pre-Market Prep LIVE sessions. Every morning, I break down the most promising stock on my morning scan. I go over what I look for in trades so you can develop your own trade ideas.
How to Use Short Interest When Trading Stocks: Examples
The WallStreetBets crowd weaponized short interest with GME. When that worked, they looked around for other stocks with high short interest, like AMC Entertainment Holdings Inc (NYSE: AMC).
Both stocks had a parabolic rise as traders targeted shorts…
But they’re a weird example of the effect of short interest on stocks. AMC’s short interest wasn’t even that high!
Whether or not short-interest stocks become a recurrent market force, there are lessons you can learn from all of this.
Watch Out … or You Might Get Stopped Out
During these meme stock spikes, traders made money long AND short.
But a lot of people lost money on the insane volatility.
Volatility is something short-term traders should look for. But it’s hard to factor it into a trading plan when the swings get into the hundreds of dollars!
This isn’t how high short interest usually affects charts … But it’s something to be aware of.
High short interest means that there are a lot of bears in the stock. They’ve got to be right some of the time.
Beware the Long Squeeze
A long squeeze is the opposite of a short squeeze. It’s what happens when the price trends lower and forces longs out … sending it lower still.
This puts shorts in the driver’s seat. They might buy to cover or stay in their positions. Either way, they’ll be proven right.
Friday Is Short Squeeze Day
Fridays bring reliable short squeezes with them. These are mostly short sellers who’ve been betting on weekday runners falling. If it hasn’t happened by the weekend, they’ll want out.
This is why Friday is one of my favorite days to trade. The momentum from a Friday squeeze can send an OTC runner even higher…
Combined with a well-timed press release, this can cause the stock to gap way up.
What Can Short Interest Teach Us?
Most of the time, you won’t find big short interest in solid companies.
Tesla Inc.’s (NASDAQ: TSLA) short interest used to be high. Then the company’s stock shot up 700% throughout 2020, and the shorts took a bath.
Tesla even did a run of collectible ‘short shorts.’ Another reason why I love Elon Musk!
If you look at the stocks with the highest short interest today, you’ll find a few capable of big runs. I wouldn’t feel comfortable holding a short position for too long in the EV sector, but that’s just me.
What Is the Short Interest Ratio?
I like calling the short interest ratio ‘days to cover’ to avoid confusion … It’s the average number of days it takes for shorts to cover their position in a stock.
It’s easy to figure it out. Take the number of shares shorted and divide it by the stock’s average daily volume.
It’s another thing to look at when weighing short-squeeze potential. The higher the days-to-cover ratio, the greater the potential for a short squeeze.
But beware. Shorts are like vultures. If they’ve been circling for a while, you’re probably not doing too well.
Short Interest vs. Put-Call Ratio: What’s the Difference?
Both are indicators of market sentiment. Just like high short interest can point to bearish sentiment, so can a put-call ratio that slants to the put side.
Put options give traders the right — but not the obligation — to sell a stock at a certain price. If the stock is selling for less than that price when the put is exercised, the trader can make money.
Looking at either of these measures can give you a good idea of what the market’s feeling … But as we saw with GME’s shorts, traders can be wrong.
Limitations of Using Short Interest
I don’t trust market sentiment to translate into a price swing. The market is a discounting machine. That means that everything known about a stock is already built into its price.
The stocks I spotlight with the SteadyTrade Team usually have news catalysts moving them. These previously unknown factors are the things that move stocks.
Short interest can play into the resulting move… so can the stock’s sector and it being a former runner.
But these factors will never be the reason I make a trade.
If you want to see what goes into the trading plans we build on the SteadyTrade Team, it’s no secret. We’re looking for a combination of:
- Low float
- Price up more than 10%
- Unusual volume
- Former runner
- Clear support to set risk
We do this every trading day before the market opens. Then, when the market closes, we go over what worked and what didn’t. We look at entries, exits, and all the things that make the difference between profit and loss.
We have weekly strategy webinars and the best chat room around. Up your trading game today and join the SteadyTrade Team now!
What Are the Stocks With the Highest Short Interest Rates?
There are a lot of stocks with high short interest. What does it mean? That’s up to you to find out.
Bed Bath & Beyond Inc. (NASDAQ: BBBY) was one of the stocks targeted by the Reddit brigade in January and June. Unlike GME and AMC, it has trended back down to pre-spike levels.
It still has significant short interest, at just under 20% … although the shorts backed off since its June breakout.
Its fundamentals read pretty much the same now as then. But that wasn’t what moved the stock in its spikes.
It’s still a mall store without much upside. But then again, so is GME!
And then there are more controversial shorts, like EV company Nikola Corp. (NASDAQ: NKLA).
NKLA rode 2020’s EV momentum to new heights, but lately, the stock has been trending down. A big part of this was the work of activist short sellers Hindenburg Research.
Some activist short sellers have been accused of manipulating the market. That’s the same thing NKLA accused these guys of…
But they didn’t deny Hindenburg’s central accusation. The short seller claimed that NKLA’s 2018 video showing its electric truck ‘in motion’ was filmed on a hill. Hindenburg figured out the location using Google Street View and recreated the video … reaching 56 miles per hour on a truck left in neutral.
That was September 10 of last year. After the report, other traders got wise to the fact that the company doesn’t really have a product. Its founder resigned, the SEC started investigating, and the stock has been on a decline ever since.
NKLA’s short interest currently sits around 25%.
Unless WallStreetBets is circling, high short interest isn’t necessarily attractive. But I’m still watching these two highly shorted stocks.
Blink is another much-hyped EV stock that came under short seller attack.
This time, the charges were garden-variety exaggeration. That’s nothing too unusual in the world of speculative trading!
The stock has since had a full recovery. And even though it’s trending down from all-time highs in February, it’s still in 2020’s hottest sector.
Its short interest hovers at 31%.
Workhorse Group Inc. (NASDAQ: WKHS)
Workhorse has been in my sights ever since Cathie Wood bought the dip in February.
She’s rarely wrong. I call her ‘the Elon Musk of investing.’ She’s riding one of the hottest hands in trading.
But she might be wrong here. Since her buy, the stock’s only dipped further. Its short interest sits at 36%.
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The Short Interest Conclusion
I hope you’ve learned more than you’ve ever wanted to know about this indicator.
It can be important, but it’s no silver bullet. It’s just one more thing to pay attention to when you consider a trade.
As for that other stuff — it’s why I became a teacher. There’s so much more to the market than can’t-miss stock picks. And luckily, actual trading knowledge is easier to come by.
Just like the WallStreetBets guys, I want more regular people to do well with trading. But unlike those guys, I’ll teach you the skills you need to get there.
What do you think about trading heavily shorted stocks? How did you trade GME? Let me know in the comments — I love hearing from readers!