Selling short a stock reverses the normal order of buying it and then selling it. Selling short means to sell something you don’t own. When hedge funds and large players sell a stock short they borrow the stock from their broker and sell it to a buyer in the marker. They then owe the broker the shares. They receive cash from the sale but have to use it to buy the shares later to pay back the broker for the loan of borrowed shares. A short seller is long cash and short the shares on their bearish trade. These shares they sold short must be bought back on the market so the shares can be returned to the broker. Short interest in a stock is built in future buyers. Shares that are short must be bought to cover at some point. If short sellers all rush to cover they can create a short squeeze due to the created buying pressure.
The short interest in a stock is the amount of shares outstanding that are currently sold short and still need to be bought back to cover those positions. The short interest in a stock can be a number or percentage of the total shares outstanding. A short interest number quantifies how many shares of a stock are currently short while a short interest percentage expresses what percent of the total outstanding shares that are short. Days to cover is another way of measuring how long it would take to cover all the shares short based on daily average volume.
The short interest for a stock shows the market sentiment on that stock. A high short interest shows there are a lot of bearish bets against the stock and a low short interest can show that sentiment is bullish. The most important thing to consider with short interest is when it reaches extremes in either direction.
A gamma squeeze can force additional buying activity on a stock because of open option positions on the underlying stock. A gamma squeeze is one of the causes of the extremely parabolic Gamestop chart price action in 2021.
When an option trader sells to open an options contract, they are likely not writing a contract on an existing stock share but instead creating a derivative with a market maker. Usually the option trader and market maker are creating an options contract where both the underlying stock and the risk of liability only exist with the counter party within the options market. These positions can cause the movement of stocks due to hedging and option exercise.
The buying of call option hedges for new short positions along with new call option buyers caused the market makers to need to buy more GME stock to hedge all these call options they wrote. Gamma squeezes can move fast in both directions and can go down as fast as they go up as hedges need to be added early on they can also be sold off quickly as the call options are bought back, sold to close, or expire. High short interest can also cause a gamma squeeze due to the large amount of long call options used to hedge the short positions. The option plays being exited can cause a chain reaction and volatility in both directions.
What is a high short interest percentage?
- Short interest below 10% signals bullish sentiment.
- Short interest over 10% starts to signal bearish sentiment.
- Short interest over 20% starts to show extreme bearish sentiment.
- Short interest over 30% can start signaling it may be late in the bearish downtrend price cycle.
- Short interest over 40% can begin exposing short sellers to the dangers of a short squeeze or at least a temporary dead cat bounce back higher suddenly.
The stocks that have reached maximum bearishness can also be the ones with the greatest potential for upside moves in percentage terms when short sellers have overstayed their time in a short position. As the amount of a stock’s share float exceeds 40% of available shares short the risk/reward ratio can shift against the short seller and in favor of a long position. The level of short interest is what we are looking at in the below list.
What is the most heavily shorted stock?
Currently the most shorted stock right now is Beyond Meat, ticker symbol BYND traded on the NASDAQ exchange with a 41.40% short interest. Beyond Meat has fallen from a 52-week high of $108.04 on November 11, 2021 to a recent 52-week low of $11.90 on October 24, 2022.
This company had what looks like a recent short covering rally and price action just has a recent 5-day / 20-day EMA crossover which tends to be a good signal for swings and trends to the upside in stocks that tend to trend. The 5-day / 20-day EMA cross under signal also kept people safe with an exit from a long position or short during downtrends.
What are the most shorted stocks right now?
Here is a list of the current most shorted stocks going into October 2022.
Rank/Ticker/Company/Exchange/Short Interest/ Industry[1]
- BYND Beyond Meat Inc Nasdaq 41.40% Food Processing
- BBBY Bed Bath & Beyond Inc. Nasdaq 39.25% Retail (Specialty Non-Apparel)
- UPST Upstart Holdings Inc Nasdaq 38.13% Consumer Lending
- CVNA Carvana Co NYSE 36.31% Retail (Specialty Non-Apparel)
- MSTR MicroStrategy Inc Nasdaq 34.40% Software & Programming
- NKLA Nikola Corporation Nasdaq 33.79% Auto & Truck Manufacturers
- BIG Big Lots, Inc. NYSE 32.48% Retailers – Discount Stores
- EVGO Evgo Inc Nasdaq 31.19% Utilities – Electric
- FUV Arcimoto Inc Nasdaq 30.06% Auto & Truck Manufacturers
- W Wayfair Inc NYSE 29.90% Retailers – Department Stores
- FFIE Faraday Future Intelligent Ele Nasdaq 29.47% Auto & Truck Manufacturers
- BGFV Big 5 Sporting Goods Corp Nasdaq 29.19% Retailers – Miscellaneous Specialty
- IBRX Immunitybio Inc Nasdaq 28.34% Biotechnology & Medical Research
- BLNK Blink Charging Co Nasdaq 26.84% Utilities – Electric
- FUBO Fubotv Inc NYSE 26.76% Online Services
- HYZN Hyzon Motors Inc Nasdaq 26.35% Heavy Machinery & Vehicles
- VERU Veru Inc Nasdaq 25.91% Personal Products
- WKHS Workhorse Group Inc Nasdaq 25.83% Auto & Truck Manufacturers
- MVIS Microvision, Inc. Nasdaq 25.53% Electronic Equipment & Parts
- HRTX Heron Therapeutics Inc Nasdaq 24.63% Biotechnology & Medical Research
- SRG Seritage Growth Properties NYSE 24.52% Real Estate Operations
- RIDE Lordstown Motors Corp Nasdaq 23.96% Auto & Truck Manufacturers
- SFT Shift Technologies Inc Nasdaq 23.71% Retailers – Auto Vehicles, Parts & Service
- PETS Petmed Express Inc Nasdaq 23.70% Retail (Drugs)
- SPCE Virgin Galactic Holdings Inc NYSE 23.52% Aerospace & Defense
Short Squeeze Strategy
Traders and investors can pick stocks on this list that they may have a bullish fundamental case for. Whether a business recovery or a deep value play. Look at each chart for potential signals for entries and exits and backtest them. Place the stocks from this group on your watchlist that fit your trading strategy. Position size right, set a stop loss, set a profit target, use a trailing stop, and manage the trade as it plays out. This list can help show and alert deep dip buyers on potential good risk/reward ratio set ups.
