What is Days to Cover?
Days to Cover, often used interchangeably with “short interest ratio,” is the number of days necessary for all short positions to be covered, i.e. bought back by the short-seller and returned.
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How to Calculate Days to Cover
The days to cover, or short interest ratio, is the number of days needed on average for all shares sold short to be covered and closed.
The days to cover metric estimates the average number of days it would take for all short-positions on a particular company’s stock to be covered.
As an indicator of short interest, days to cover can be useful for assessing the ease (or lack of) of buying shares that were sold short.
The days to cover gauges the overall market sentiment regarding specific securities and the potential for dramatic share price movements, i.e. a “short squeeze.”
Days to Cover Formula
The formula for calculating the days to cover metric – also known as the short-interest ratio – divides the number of shares currently shorted by the average daily trading volume of the security in question.
Short interest is the number of shares sold short, i.e. borrowed and sold in the open markets by a short-seller to profit from repurchasing the shares at a lower price.
For example, if the total number of shorted shares on a company is 8 million and the average daily trading volume is 2 million shares, days to cover is two days.
- Days to Cover = 8 million / 2 million = 4 Days