What does the expression in the thread title mean? A CEO, commenting on the large number of the company’s shares being held as short options, refuted the perceptions that led people to sell short, and then said that “the short position will take a staggering 20 days to cover.” What does that mean?
I understand what selling short is, but not this “days to cover” business.
And is “the large number of the company’s shares being held as short options” phrased idiomatically? If not, what is a better way to put it?
(I hate having to write about things I don’t know much about.)
“Covering a short” means buying new shares to replace the ones that you borrowed. Normally, there’s an agreed upon time when you must return/replace shorted shares, but many times one finds a reason to cover the shares early – if the share price starts going up, for instance, or if the capital gains rate is going up. If a company has a LOT of shares shorted, there’s a lot of competition for cheap shares, and it may take a long time (“a staggering 20 days”) to buy the necessary shares at the desired price.
The term “short options,” IIRC, just means that the short seller owns no shares himself, but must buy some shares to cover his shorts (heh). Thus, a company may have a lot of shares that short sellers are contractually obligated to buy by a certain date.
Nameta: Thanks. And so the number of days given is the number of shorted shares divided by the average daily trading volume of the stock? But average volume over what period?
Well, I don’t really know a whole lot about this myself (someone will come along, I’m sure) but unless I’ve misunderstood what’s been said here, I think the confusion is that there’s a difference between shorting a stock versus shorting options. The latter is known as puts, which have an expiration date, and you need to cover it before that date. That’s the way I understand it, anyway,
“Days To Cover” is used in conjunction with the short-selling of stock. “Short Interest” refers to the total amount of shorted shares at a point in time. The problem for short-sellers is that, at some point, they have to buy the shares back. But if they all try to buy them back at once, they will drive the price up (against their own self-interest). This is known as a “Short squeeze”. Days to Cover is calculated by taking the Short Interest and dividing by the average daily trading volume of the stock. The higher the Days To Cover number, the riskier the short position.
I’m not sure that there is a standard way to calculate this. However, investopedia says to use the one-month average. I get NYSE reports every month on my company’s stock and I can’t figure out their methodology. But here’s the link to investopedia: