Weak Shorts

AAA

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.

RELATED TERMS
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches ...
  2. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  3. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  4. Covered Bear

    A trading strategy in which a short sale is made on a long position. ...
  5. Weak Longs

    Refers to the group of investors that holds a long position and ...
  6. Close Position

    Executing a security transaction that is the exact opposite of ...
Related Articles
  1. Active Trading Fundamentals

    When To Short A Stock

    Learn how to make money off failing shares.
  2. Active Trading Fundamentals

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  3. Active Trading Fundamentals

    A Look At Exit Strategies

    Setting appropriate exit points should help you avoid taking premature profits or running losses.
  4. Active Trading

    How To Survive The Trading Game

    Gain insight into how a trader/programmer approaches the task of designing a trading system.
  5. Mutual Funds & ETFs

    Shorting ETFs: Profit Or Peril?

    Although more detail and attention may be needed, ETFs can be shorted - and at a great profit.
  6. Options & Futures

    Stop Hunting With The Big Forex Players

    Learn to bank short-term profits by placing stops away from the crowd.
  7. Active Trading Fundamentals

    Limiting Losses

    It is impossible to avoid them completely, but there is a systematic method you can use to control them.
  8. Options & Futures

    Using The VIX For Shorting Opportunities

    Find out how to use this tool to identify opportunities.
  9. Active Trading Fundamentals

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  10. Active Trading Fundamentals

    Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.

You May Also Like

Hot Definitions
  1. Risk-Free Rate Of Return

    The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would ...
  2. Scarcity

    The basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, ...
  3. Trust Fund

    A trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. The ...
  4. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  5. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  6. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
Trading Center