Definition of 'Weak Shorts'
Traders or investors who hold a short position in a stock or other financial asset who will close it out at the first indication of price strength. Weak shorts are typically investors with limited financial capacity, which may preclude them from taking on too much risk on a single short position. A weak short will generally have a tight stop-loss order in place on the short position to cap the loss on the short trade in case it goes against the trader. Weak shorts are conceptually similar to weak longs, but the latter employ long positions.
Investopedia explains 'Weak Shorts'
Weak shorts are more likely to be carried out by retail traders rather than institutional investors, since their financial capacity is limited. That said, even institutional investors may find themselves in the weak-shorts camp if they are financially stretched and cannot afford to commit more capital to a trade.
The presence of weak shorts may intensify volatility in a stock or other asset. This is because they will be inclined to exit their short positions if the stock shows signs of strengthening. Such short covering may drive up the stock price rapidly, which may force other traders with short positions to close them for fear of being caught in a short squeeze.
Subsequently, if the stock begins to weaken and again looks vulnerable, the weak shorts may reinstate their short positions. Weak shorts may be constrained by the availability of capital, but may still have a high degree of conviction in their short idea. Heavy shorting activity would aggravate the stock’s weakness, driving its price down quickly. This trading pattern thus leads to heightened stock volatility.
Traders often look for stocks with heavy short interest, which is used as a contrarian indicator to identify stocks that may be poised to move up on a short squeeze. Stocks that are heavily shorted primarily by retail investors – i.e. weak shorts – may be better short-squeeze candidates than those where the short positions are mainly held by institutions with deep pockets, such as hedge funds. While short interest for a stock is provided on a consolidated basis and is not categorized as retail or institutional, one way to identify retail short interest is by using trading software that shows major holders of the stock and block trades. A stock with (a) minimal institutional holdings, (b) few block trades and (c) significant short interest is likely to be one with a disproportionate number of weak shorts.