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Short Interest Reflects Trader Sentiment

By Bryan Perry

Many contrarian investors, including technical analysts, reason that if "everyone" is selling, then the stock has already bottomed and can only go up. In other words, it's an indicator that the stock is about to enter its own bull market.

For contrarians, a high short-interest ratio is bullish because, eventually, there will be significant upward pressure on the stock's price as short-sellers cover their short positions (i.e., buy back the stocks they borrowed to return to the lender). Therefore, a high short interest could entice a contrarian options trader to invest in call options.

If you're interested in learning the short interest of your favorite stocks, most exchanges provide an online tool to calculate short interest for a particular security. The New York Stock Exchange's short-interest ratio is a favored metric of professionals.

The NYSE short-interest ratio is the same as general short interest, except that it is calculated as monthly short interest on the entire stock exchange, divided by the average daily volume of the NYSE for the past month.

If a stock has a high short interest in its shares, your broker may not even be able to let you short the stock. However, if there are put options available to trade, that is a lower-risk way to short the shares without being hindered by a high short interest.

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