Short Interest Ratio

What Is the Short Interest Ratio?

The short Interest ratio is a simple formula that divides the number of shares short held short of a stock by the stock's average daily trading volume. Simply put, the ratio can help an investor find out very quickly if a stock is heavily shorted or not shorted versus its average daily trading volume. The term is also used interchangeably with days to cover.

The Formula for Short Interest Ratio Is:

Short   Interest   Ratio = S I A D T V where: S I = Short Interest A D T V = Average Daily Trading Volume \begin{aligned}&\textbf{Short Interest Ratio}=\frac{SI}{ADTV}\\&\textbf{where:}\\&SI= \text{Short Interest}\\&ADTV = \text{Average Daily Trading Volume}\\\end{aligned} Short Interest Ratio=ADTVSIwhere:SI=Short InterestADTV=Average Daily Trading Volume

What the Short Interest Ratio Can Tell You

The ratio tells an investor if the number of shares short is high or low versus the stock's average trading volume. The ratio can rise or fall based on the number of shares short. However, it can also increase or decrease as volume levels change.

Example of How to Use the Short Interest Ratio

The Tesla chart below shows the short interest ratio, the number of shares short, and the daily average trading volume. In the example, one can see that a rising short interest ratio does not always correspond to rising short interest.

In July and August 2016, the short interest ratio rose despite the number of shares short falling. That was because the daily average volume fell sharply during that time. Additionally, the short interest was steadily declining in 2018 despite short interest being elevated because the average daily volume was steadily rising on the stock.

Image by Sabrina Jiang © Investopedia 2021

The Difference Between a Short Interest Ratio and Short Interest

It is essential to remember that the short interest ratio and short interest are not the same. Short interest measures the total number of shares that have been sold short in the market.

The short interest ratio is a formula used to measure how many days it would take for all the shares short in the marketplace to be covered.

Limitations of Using the Short Interest Ratio

The short interest ratio has several flaws, the first being that it is not updated regularly. Short interest is reported every two weeks and is usually as of the 15th and the last day of the month. It takes several days before the information is published and by that time, the number of shares short in the market may have already changed.