Has anyone ever proved the short interest ratio can be used for anything? I would bet that a lot of the position, ie overnight, shorts are being used in options hedges or other ways that imply no fundamental bias.
AAA I saw a paper that claims short interest is an essential component, yet not the only one of short only strategies. Nevertheless those papers are always - well you know not written by people with a daily pnl to prove whether they are right or not. I saw a short fund in california who made an annualised profit of 14% during the whole nineties and they used kind of fundamental evaluation bands where they would sell the stock at the higher band and buy it back at the lower. Short only strategies are in my opinion a really tough game. That's why so few are making it. peace
AAA nevertheless an interesting point you are making on the option side. but wouldn't hedging long delta essentiallly mean the same: concern at the downside? I will bear in mind what you said. I think one should see it in the correlation between option open interest and short interest whether high short interest is a mere byproduct of an active options market in a specific stock. good point. peace
I have shorted equities for some time, and always use options throughout the process. As you say, I was always looking for about 10 - 30% although the companies could have come out with terrible news any day, as anyone can. For me, the short interest ratio was confirmation that others were seeing the same things I was. That can also provide an idea of short-term upside risk during a squeeze or a corporate hype release. I used fundamentals exclusively. Balance sheets, burn rates, closely approaching debt covenants, potential debt downgrades and other catalysts. The fundamental reason always had to be that the company did not possess a competitive advantage, could not make profits over the long term (or usually even the short term) and would eventually file BK or be absorbed by another company at a fraction of the current price. I had a number of stocks last year that I held short for the entire year. Some were trading near the same price all year (+- 15%) yet I had a 20 - 25% return from writing options on both sides throughout the year. Personally, I prefer equities to ETFs (for outright shorting) because an ETF can never come out and announce that they cooked the books or will miss earnings.