The Financial Advisor Update

Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW

Three Risks Every Short-Seller Must Know

10/18/07 - 11:55 AM EDT

Scott Rothbort

Short Interest. This represents the total amount of shares currently short. Short interest is reported to and disseminated by the stock exchanges, such as the NYSE new-york-stock-exchange-nyse NYX and Nasdaq nasdaq-stock-market NDAQ on a monthly basis (see "How Do I Find Short Interest for a Stock?"). This is an absolute number, which is not important in and of itself, but it is the first component in calculating the next metric, the short ratio.

Short Ratio. The short ratio is sometimes referred to as the "days to cover." This ratio represents the amount of days (on average) that it will take for all short-sellers to cover ("buy-in") their short positions. It is calculated by dividing a stock's short interest by its average daily volume volume. The higher the ratio, the more risky it is to short the stock, because it will take the short-seller a longer period of time to cover the short than for a stock with fewer days to cover.

Please be cognizant of the fact that the short ratio assumes that in the event that all shorts were to cover, they would do so to the exclusion of long buyers. Thus, in reality, it will take more days to cover all shorts than the short ratio implies.

Short Percentage of Float. This represents the percentage of a company's available stock float float, which is already short. The greater this percentage, the greater the implication of the likelihood that the stock is a "crowded" short -- one that is heavily shorted. A higher short percentage of float also portends that the availability of stock to borrow could be in heavy demand and limited supply.

Don't get "short squeezed." Analyze these metrics carefully before you initiate a short sale.

Homework Time

This closes out my series on short-selling. By now, you should have a grasp of the essentials of what's involved in shorting stocks and how to do it. However, that should not preclude you from doing some homework:

  • For a short sale that you have on or are considering, identify the short interest, short ratio and percentage of shares short.
  • Observe a buy-in.
  • Observe a short squeeze.



1 2 3 4
» Next
At the time of publication, Rothbort was had no positions, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


Life & Money

The Financial Advisor Update

Go To Section Home


10/11/07
Three Strategies Every Short Seller Must Know

Here's a primer on what you need to know before you 'short' a stock.


10/08/07
How Short Selling Works

Here's a primer on the mechanics of a 'short sale.'


09/27/07
Five Lessons From the Mortgage Meltdown

Some timeless points from this year's credit market dislocation.


06/21/07
Finance Professor: Five Hedging Techniques You Must Know

Learn how pairing, shorting, ETFs, futures and options can help you reduce the risk in your portfolio.


06/15/07
The Finance Professor: Manage Risk Like a Pro

Learn how to identify, quantify and control potential stock losses.


05/30/07
The Finance Professor: Understanding Risk

Learn about the different forms of risks you might encounter in the market.


05/19/08
Cramer on Top Searched Stocks: Yahoo!

Yahoo! is among the most searched stocks on TheStreet.com. Here's what Cramer had to say about the stock recently.


05/17/08
Jim Cramer's Best Blogs

Catch up on his thinking on the hottest topics of the past week.


04/26/08
Coming Week: Make or Break

Investors will have to deal with a Fed meeting and another flood of earnings and economic data.


05/19/08
Top Rocket Stocks: Ensco

Ensco International and Echelon have the potential to move higher in coming days.


04/28/08
Monday's Analysts' Upgrades, Downgrades

See who made what calls.


05/19/08
Telecom Giants See a Savior in Video

The addition of video is helping telecom companies compete against cable and satellite companies.


05/19/08
Contract Expiration Tempers Oil's Rise

The June West Texas Intermediate contract reflects selling pressure ahead of Tuesday's expiration. But stocks in the sector are generally trading higher.


05/19/08
Analysts' Upgrades, Downgrades: Amazon

See who made what calls.


Your Recent Quotes: Quote Up0 | Quote Down0
Dow S&P 500 NASDAQ
Oil*
Gold
10 Yr
0.00%
%
%
%
Data delayed 20 min
Sign up for our FREE newsletters now.

Keep on top of the market and the critical information you need to make more profitable investing decisions.

  • Cramer's Daily Booyah!
  • Before the Bell

Privacy Policy

See All Free Newsletters

Premium Stock Ideas
Access Action Alerts Plus to find out Cramer’s latest picks now!