Days to Cover

How to Interpret the Days to Cover

Calculating the days to cover helps understand the vulnerability of a specific stock to a “short squeeze”.

Generally, competition is directly related to higher stock prices, so the higher the number of days to cover, the greater the probability of a short squeeze.

In the example above, if all the short-sellers desired to close positions right now, it would take roughly four days in total.

• High Days to Cover → Long Time to Unwind Short-Positions
• Low Days to Cover → Short Time to Unwind Short-Positions

In the unfavorable scenario where the share price rises, a lower days to cover metric is clearly preferred because a short-seller would seek to close out the position to minimize their losses.

• If a short squeeze were to occur, the lower the number of days to cover, the better off the short-sellers are (i.e. they can quickly close out short positions and exit).
• If the number of days to cover is longer, the chance of incurring substantial losses from the inability to close out the short is much greater.

What is the Risk of a Short Squeeze?

In the case of a short squeeze, the losses will grow each day as while the share price soars, the trading volume also picks up as more outside buyers in the market attempt to purchase shares.

Thereby, a short-seller should avoid shorting securities with already high short interest and long days to cover because the risk of steep losses might outweigh the potential returns.

Learn More → Hedge Fund Primer

Days to Cover Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Days to Cover Calculation Example

As mentioned earlier, calculating days to cover – i.e. the short-interest ratio – involves dividing short interest by the average daily trading volume.

• Days to Cover = Number of Shares Short ÷ Average Daily Trading Volume

If we assume 10.5 million shares of a company are sold short and the average trading volume per day is 4.2 million, the days to cover is around 2.5 days.

• Days to Cover = 10.5 million / 4.2 million
• Days to Cover = 2.5 Days

The takeaway is that if all short-sellers decided to exit simultaneously, they would need 2.5 days to repurchase the shares in the open market to return them to the brokerage firm or institution that originally lent them the shares.