What is 'Days To Cover'

Days to cover is a measurement of a company's issued shares that are currently shorted, expressed as the number of days required to close out all of the short positions and calculated by taking the number of shares that are currently shorted and dividing that amount by the average daily volume for the shares in question. For example, if a company has average daily volume of 1 million shares and 2 million shares are currently short sold, the shares have a cover rate of 2 days (2M/1M).Days To Cover

BREAKING DOWN 'Days To Cover'

Also referred to as the short-interest ratio, the days to cover measures the future buying pressure on a stock that is virtually certain to happen as short sellers must buy back shares to close out the positions. If a stock's price begins to rise significantly, investors who have short sold the stock quickly begin to close out the positions by purchasing shares off the open market. This occurs because short sellers aim to purchase the shares back for the lowest price possible. Signs that the share prices are about to rise create buying pressure for the stock and drive the price up even more. The longer the buyback process takes, as referenced by the days to cover, the longer the price rally continues based solely on the need of short sellers to close positions.

Short Selling Process and Days to Cover

Short selling involves borrowing shares from a broker, selling the shares on the open market and buying the shares back in order to return them to the broker. The hope is that, once the shares are borrowed and sold, the price of the shares fall, allowing the investor to repurchase the shares at a price lower than the amount for which the shares sold, resulting in a monetary gain.

The days to cover represents the total amount of time it is estimated to take in order for all short sellers currently active in the market with a particular security to buy back the shares that were lent to them by a brokerage. If a previously lagging stock turns very bullish, the buying action of short sellers can result in extra upward momentum. The longer the days to cover, the more pronounced the effect of upward momentum may be, which potentially results in larger losses for short sellers who are not among the first to close their positions.

Example Days to Cover in the Stock Market

On May 2015, Microsoft Corporation (MSFT) was listed with the days to cover metric listed as 2.58 days, while the average across all of the securities on the Down Jones Industrial Average was showing a days to cover of 3.74. This led shares of MSFT to become the 17th most shorted security in the marketplace as positive news regarding Microsoft Corporation activities could cause stock prices to raise sharply while short sellers work to close their positions.

RELATED TERMS
  1. Short Interest

    The quantity of stock shares that investors have sold short but ...
  2. Buy To Close

    Buying to close involves purchasing an offsetting position to ...
  3. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
  4. Short-Interest Theory

    A theory which holds that a security with a high degree of short ...
  5. Cushion Theory

    The theory used when many investors have taken a short position ...
  6. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
Related Articles
  1. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  2. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  3. Trading

    The Short Squeeze Method

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

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
  5. Investing

    Bank of America Short Interest Declines Again

    With Bank of America shares trading at eight-year highs, short sellers continue to run away.
  6. Investing

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but it usually occurs after a collapse, not before.
RELATED FAQS
  1. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  2. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
  3. How does one make money short selling?

    Short sellers make money by betting a stock they sell will drop in price. If it drops, the short seller buys it back at a ... Read Answer >>
  4. How does short selling help the market and investors?

    Find out how short sellers provide a service to the market by acting as a check against overvalued companies and exposing ... Read Answer >>
  5. What Happens When Borrowed Short Shares Are Sold?

    In a short-sale transaction, shares are borrowed from the lender and sold in the market. Read Answer >>
  6. If I short sell $5,000 worth of stock and the stock becomes worthless, wouldn't the ...

    The simple answer is that the maximum return of any short sale investment is 100%; however, the concepts underlying short ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center