Short Interest Ratio

Short interest ratio is a metric that reveals positive or negative sentiment about a stock. To calculate the short interest ratio, divide the total number of shares in a company investors have sold short by the stock's average daily trading volume. For example, if a company with 100 shares trading on the open market has 10 shares sold short, and 5 of the company's shares are traded each day, then the short interest ratio is 2. Short interest ratio is also referred to as "days to cover" because it reveals how many days of trading short sellers would need to buy back shares and cover their short position. Knowledgeable investors consider a high short interest ratio to be a bullish signal and a low short interest ratio to be a bearish signal. A high short interest ratio is considered bullish because in theory it indicates that market sentiment about a stock has become excessively negative, presaging a possible rally. However, some investors consider using the short interest ratio to make trading decisions problematic because short interest is published only once per month, rendering the data stale after a few days.