What the heck is a short float and why is it important for you to know?
On the SteadyTrade podcast, we’ve interviewed dozens of successful traders. Many of them use short float as a critical part of their trading strategies. That’s a key clue right there.
The short float is good to know no matter your trading strategy or market approach.
And if you wonder how many shares of a stock are borrowed for short selling … Or what can drive those glorious parabolic moves that we love to trade so much…
I want to tell you about a hidden gem — the short float.
What Is Short Float?
Short float is the number of shares short sellers have borrowed from the float.
That might sound like a foreign language. Let me back up and give you some basics.
When you short sell a stock, it’s the opposite of the better-known strategy of going long (buy low, sell high). Here, you borrow shares from your broker and sell them. Later, you have to buy to cover and give them back to the broker.
With shorting, you’re betting the stock will go down. Here’s a post on short selling, in case you need to brush up.
Now, a stock’s float is the shares that are available to the public. You’ve got shares outstanding, which are all the shares that exist for that stock. Some shares are restricted, meaning the average trader can’t access them. That leaves us the float…
Twice a month, brokers report the number of shares short sellers are borrowing. The borrowed shares come from the float.
In this post, I’m going to focus on what short float is and what it means to you as a trader.
What Is Short Float Percentage?
The short float percentage is the percentage of the float that’s borrowed. It’s also called short interest.
To get the short interest, you take the short float, divide it by the float, and multiply by 100.
For example, say you’ve got a stock with one million shares in the float. The short float report came out today, and it says there are 100,000 shares short.
So 100,000 divided by one million gives you 0.1. Multiply that by 100 and you get 10%.
Of course, the numbers will rarely be that clean, but you get the idea.
It’s important to remember that these numbers are only fresh twice a month. If there’s any question about when the data came out, you can check the website of any of the major exchanges. The new data is usually posted on the first and the 15th.
What’s the Difference Between Short Float and Short Float Ratio?
The short float ratio is the number of days it would take to cover all the shares short at average daily volume. That’s a mouthful…
Here’s another way to think about it. We assume every buy order is a short seller covering. We look at the average daily volume over 60 days. Then we figure out how long it would take every short to cover if the volume stays around the average.
You take all the shares short and divide it by the average daily volume. That tells you how many days it would take to cover all the shares short. Of course, not every buy order is a short covering…
Say there are 1,000 shares short and the average daily volume is 1,000 shares. In theory, you could get all the short shares covered in one day. The short ratio would be 1.
Why Is Short Float Important?
Short float and short interest can tell you a lot about a stock. Why?
It’s a measure of sentiment. You have to pay interest on borrowed shares. So if the short float is high, you know that people are committed to their belief that the price will go lower.
You often see high short ratios on beaten-down stocks.
On the flip side, sometimes you have a high short float on an uptrending stock. Those tortured shorts are looking to get out. That can cause a rapid increase in price and a short squeeze.
What Is a Low Short Float?
In over 10 years of trading, I’ve seen a wide variety of data.
The lowest a short float can get is zero. That means there are no borrowed shares. This can happen on stocks with hard-to-borrow shares. It can also follow a massive short squeeze where all the short sellers have panicked out.
In the rare instance that a stock doesn’t have shares in the float, of course it would have a low short float. And low float stocks can have a low short float but high short float ratio.
Remember that short float interest or short ratio is a relative statistic. Short float by itself is just a number.
I’d say that 10%–20% is a low short ratio.
Is Low Float Good?
I love low float stocks.
The year 2020 brought unprecedented volume to the market. My friend Tim Sykes and I talked about it in the “Volatility Survival Guide.”
I used to think that a stock with fewer than 10 million shares was a low float stock. These days, floats of 20 million or 30 million shares can be low float. It’s about float relative to volume.
The reason is volatility. It’s all based on supply and demand. The float is supply, and volume is demand. When a stock has a low float, it takes less volume to move the price.
A short seller has to buy to exit their position. And if you’re short, you’re betting on the price to go down. So, when the stock goes up past your entry, you’re losing money.
If you have a lot of shorts on a low float breakout, short sellers turn into buyers. If they’re respecting their stop losses.
What Is a Good Short Float?
If you’re looking to go long on a breakout, the more shorts, the merrier. A low float stock with a short ratio of about 40% can really get things going. The breakout squeezes the shorts out of their positions. Even stubborn shorts might be forced to buy.
If the price gets too high for their account to handle, their broker may buy them in. They might even face a margin call.
If you’re a short seller looking to ride the trend down, you want a smaller short interest. It’s good to know you have others on your side — the trend is your friend. But you also don’t want to be in a short squeeze if good news for a stock comes out.
You want to walk the line between being the only one and being in a dangerous crowd. I would say if you’re looking to go short, find a stock with a low short interest — about 15%.
How Can Short Float Benefit You?
Be honest. You love those parabolic moves, right? You want to be long one of them, don’t you?
Well, those moves don’t happen on their own. Those massive runs aren’t thousands of investors realizing they’ve found the next best thing. After all, these are penny stocks.
Many of them are horrible companies with awful fundamentals. More often than not, these junk stocks attract aggressive short sellers. And momentum traders.
If a stock has a high short interest and it’s making new highs, it’s likely you’ll get a short squeeze. Even more so if the stock is low float.
It’s a little counterintuitive. The higher the short float, the more likely a squeeze. If you’re looking to short a stock, find a lower short float.
What Information Does a Short Float Show?
The short float will show you a few things…
- It can tell you how many shares are short.
- It’s a good gauge of the sentiment on a stock.
- The short interest (or short float percentage) will tell you how much of the available shares are short.
- Divided by average daily volume, it can tell you how long it would take for every short to cover their positions.
- It can hint at the possibility of a short squeeze.
How Do You Tell if a Stock Is Being Shorted?
With penny stocks, you can be somewhat sure the stock is being shorted. A lot of shorts like to brag on Twitter — which makes StocksToTrade’s Twitter scan even more appealing.
But unfortunately, aside from the short float, there’s no way of knowing for sure.
A short sale is, for all intents and purposes, identical to a sale.
There are always clues hidden in the price action. You can look for rejections at key levels. Watch the Level 2 for strange action. That could be large sales going through at key levels that aren’t on the Level 2.
Sometimes short sellers who want to take large positions will try to trick you. They’ll have a massive order out, but they’ll be hiding their size.
If you see a big order on the bid that keeps disappearing, that could be a short seller. That’s right — on the bid. You’ll see them put large orders in to try to boost confidence in the price. That pushes longs up into their trap. Then they’ll cancel their buy order.
