Generally, competition is directly related to higher stock prices, so the higher the number of days to cover, the greater the probability of a short squeeze. In the example above, if all the short-sellers desired to close positions right now, it would take roughly four days in total.
The best way to identify short squeeze candidates is to look at the number of shares short relative to a stock's average daily trading volume. This is known as the days to cover ratio. Stocks with days to cover ratios of 5 or more may be susceptible to short squeezes.
A short interest ratio of five or better is a good indicator that short sellers might panic, and this may be a good time to try to trade a potential short squeeze.
Short squeeze indicators focus on finding oversold and overbought stocks, as traders will expect their price to rise. Two popular indicators used to identify a short squeeze are the relative strength index (RSI) and stochastic oscillator, both of which are available on our online trading platform, Next Generation.
Short squeezes are typically triggered either by unexpected good news that drives a security's price sharply higher or simply by a gradual build-up of buying pressure that begins to outweigh the selling pressure in the market.
Most stocks have a small amount of short interest, usually in the single digits. The higher that percentage, the greater the bearish sentiment may be around that stock. If the short % of the float reaches 10% or higher, that could be a warning sign.
Thus, investors aim at a ratio between 8 to 10 and higher, considering this size is leading to an upswing. How do I read days to cover? The days to cover indicator measures the average number of days it would theoretically take for all short sellers to buy back their shares.
One of the most famous, significant and big short squeezes of the 21 century is the sharp rise in the stock price of German car maker Volkswagen AG (XETR: VOW) in 2008. Between 24 and 28 October in that year, the company's share price recorded a 376.65% growth, up from 210.85 to 1005.01 EUR.
Signs of a Short Squeeze
These are: An asset trading near its 52-week lows and the price is much lower than the fair value estimated by experts. The reasons for the gap may be many, but markets eventually correct and settle closer to the fair value. This is the minimum short squeeze price.
For example, if a stock has a short interest of 100 million shares and trades 2 million shares a day, then it would take 50 days to close the short position. In contrast, a normal stock might have days to cover of less than 10. A “trigger” event: Often a short squeeze needs some kind of catalyst or trigger.
A short squeeze is a situation in which a security's price increases significantly, putting pressure on short sellers to close their positions and limit their losses. Conversely, short covering involves buying back a security to close out an open short position.
A rise in short interest above the norm indicates that investors have become more bearish. But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher.
Short interest ratio as days to cover
This means that if all of the shorts wanted to cover their positions at the same time, it would take around ten days for them to do so. A high day to cover means that short-sellers would take a long time to unwind their positions if the price were to suddenly rise.
No rules exist for how long a short sale can last before being closed out. The lender of the shorted shares can ask that the investor return the shares at any time, with minimal notice, but this rarely happens so long as the short seller keeps paying the margin interest.
At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month. The price of many other heavily shorted securities and cryptocurrencies also increased.
The GameStop short squeeze, starting in January 2021, was a short squeeze occurring on shares of GameStop, primarily triggered by the Reddit forum WallStreetBets. This squeeze led to the share price reaching an all-time intraday high of US$483 on January 28, 2021 on the NYSE.
A short squeeze occurs when many investors bet against a stock by selling it short (hoping to buy it back later at a lower price), and its price shoots up instead. Short selling is risky because losses are unlimited (unlike going long, where losses are limited to your investment).
A short seller, who profits by buying the shares to cover her short position at lower prices than the selling prices, can drive the price of a stock lower by selling short a larger number of shares.
Long unwinding suggests a shift towards caution or bearish sentiment, potential price declines, while short covering indicates a move towards optimism or bullish sentiment, potentially heralding price increases.
The Bottom Line. Investors can find general shorting information about a stock on many financial websites, as well as the website of the stock exchange on which the stock is listed. The short interest ratio is calculated by dividing the number of a company's shares that have been sold short by the average daily volume.
A high ratio shows that a large portion of the stock's shares are being shorted. A short interest ratio above 20% suggests that a lot of investors are betting against the stock, and if the stock's price starts to go up, the short sellers will rush to cover their positions, and that leads to a short squeeze.
Field Tested, FT: from 0.15 to 0.37. Well-Worn, WW: from 0.37 to 0.45. Battle-Scarred, BS: starting from 0.45.