Short Interest Ratio

Short Interest Ratio — Definition and Purpose

The short interest ratio (also called “days to cover”) measures how many days it would take, at average daily trading volume, to buy back all shares currently sold short. It compares short-selling activity to a stock’s average daily trading volume and is used as a gauge of market sentiment and potential short-covering pressure.

Key Takeaways

• The short interest ratio = Short Interest ÷ Average Daily Trading Volume (ADTV).
• A higher ratio means more days required to cover short positions; often interpreted as stronger bearish sentiment or greater potential for a short squeeze.
• The metric is reported infrequently (typically bi‑weekly) and can be misleading if viewed alone.
• Always combine the ratio with real‑time volume, news, and other indicators for reliable decisions.

How to Calculate

Formula:
Short Interest Ratio = Short Interest (SI) / Average Daily Trading Volume (ADTV)

Steps:
1. Determine Short Interest (total shares sold short).
2. Determine ADTV (recent average daily trading volume).
3. Divide SI by ADTV to get the number of days to cover.

Example: If 10 million shares are short and the ADTV is 2 million shares, the short interest ratio = 10 ÷ 2 = 5 days.

What the Ratio Tells You

• Measures liquidity risk for short sellers—higher values mean it would take longer to cover positions.
• Suggests sentiment—elevated ratios often indicate bearish positioning, while low ratios suggest lighter short interest relative to trading activity.
• Signals potential for a short squeeze when many short positions exist but trading volume is low; a sudden surge in buying could force rapid covering and drive the price up.

Practical Example (Illustrative)

A stock’s short interest ratio can rise even if the number of shorted shares falls. For example, if shorted shares decline but average trading volume drops faster, the ratio increases because it would still take more days at the lower volume to cover remaining shorts. Conversely, rising volume can lower the ratio even when raw short interest is high.

Short Interest Ratio vs. Short Interest

• Short Interest: absolute count of shares sold short.
• Short Interest Ratio: contextualizes that count by dividing by ADTV, expressing how many trading days it would take to cover those short positions.

Both metrics are useful; short interest shows scale, while the ratio shows ease or difficulty of covering.

Limitations and Pitfalls

• Reporting lag: short interest is usually published every two weeks and may be several days old by the time it’s available.
• Volume sensitivity: changes in trading volume can materially alter the ratio even if short interest is steady.
• Event-driven distortions: news, earnings, or market shocks can rapidly change volume and positions, making older ratio data misleading.
• Not a standalone signal: the ratio doesn’t incorporate options activity, concentrated ownership, float size, or fundamentals.

How to Use It Effectively

• Check both short interest and the short interest ratio together.
• Compare ratio trends with recent volume, news, and price action.
• Consider complementary metrics: percentage of float shorted, open interest in options, insider activity, and fundamentals.
• Use real‑time volume and market context before acting on bi‑weekly ratio data.

Bottom Line

The short interest ratio is a useful indicator of how heavily a stock is bet against relative to its trading activity and how long it would take to cover those bets. Because it is reported infrequently and is sensitive to volume swings, it should be interpreted alongside up‑to‑date market data and other metrics rather than used in isolation.