Days To Cover
"Days to cover" measures the expected number of days to close out a company's outstanding shares that have been sold short. Days to cover are related to the short ratio as a measure of short interest in a stock. Days to cover is a temporal indication of the short interest in a company's stock. > Days to cover = current short interest ÷ average daily share volume Days to cover can be useful to traders in the following ways: It can be a proxy for how bearish or bullish traders are about that company, which can aid future investment decisions. The trader benefits if the price of the shares fall after the shares are borrowed and sold, as this allows the investor to repurchase the shares at a price lower than the amount for which the shares are sold. For example, if investors have shorted 2 million shares of ABC and its average daily volume is 1 million shares, then the days to cover is two days.
What Are Days to Cover?
"Days to cover" measures the expected number of days to close out a company's outstanding shares that have been sold short. It computes a company's shares that are currently shorted divided by the average daily trading volume to give an approximation of the time required, expressed in days, to close out those short positions.
Days to cover are related to the short ratio as a measure of short interest in a stock.
Understanding Days to Cover
Days to cover are calculated by taking the number of currently shorted shares and dividing that amount by the average daily trading volume for the company in question. For example, if investors have shorted 2 million shares of ABC and its average daily volume is 1 million shares, then the days to cover is two days.
Days to cover = current short interest ÷ average daily share volume
Days to cover can be useful to traders in the following ways:
The Short Selling Process and Days to Cover
Traders who short sell are motivated by a belief that the price of a security will fall, and shorting the stock allows them to profit from that decline in price. In practice, short selling involves borrowing shares from a broker, selling the shares on the open market, and then buying the shares back in order to return them to the broker.
The trader benefits if the price of the shares fall after the shares are borrowed and sold, as this allows the investor to repurchase the shares at a price lower than the amount for which the shares are sold. The days to cover represent the total estimated amount of time for all short sellers active in the market with a particular security to buy back the shares that were lent to them by a brokerage.
If a previously lagging stock turns very bullish, the buying action of short sellers can result in extra upward momentum. The higher the days to cover, the more pronounced the effect of upward momentum may be, which could result in larger losses for short sellers who are not among the first to close their positions.
Related terms:
Bear Squeeze
A bear squeeze is a situation where sellers are forced to cover their positions as prices suddenly ratchet higher, adding to the bullish momentum. read more
Bear
A bear is one who thinks that market prices will soon decline, or has general market pessimism. read more
Broker and Example
A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. read more
Bull
A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets. read more
Investor
Any person who commits capital with the expectation of financial returns is an investor. A wide variety of investment vehicles exist including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds, options, futures, foreign exchange, gold, silver, and real estate. read more
Outstanding Shares
Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s insiders. read more
Short (Short Position)
Short, or shorting, refers to selling a security first and buying it back later, with the anticipation that the price will drop and a profit can be made. read more
Short Covering
Short covering is a strategy where somebody who has sold an asset short buys it back to close the position. read more
Short Interest
Short interest, an indicator of market sentiment, is the number of shares that investors have sold short but have yet to cover. read more
Short Interest Ratio
The short interest ratio is a quick way to see if a stock is heavily shorted versus its average daily trading volume. read more