What are 'Weak Shorts'

Weak shorts refer to 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.

BREAKING DOWN '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 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, a trading pattern that could lead to heightened stock volatility.

Strategy of Weak Shorts

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. Short Interest Ratio

    Short interest ratio is a sentiment indicator that is derived ...
  2. Short Sale

    A short sale is the sale of an asset or stock unowned by the ...
  3. Short Interest

    Short interest, an indicator of market sentiment, is the amount ...
  4. Days To Cover

    Days to cover is a measure of a company's issued shares that ...
  5. Net Long

    Net long refers to a condition in which an investor has more ...
  6. Bear Squeeze

    During a bear squeeze, market conditions force investors to buy ...
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. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  3. Investing

    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.
  4. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  5. Financial Advisor

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
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. How Do I Find a Stock's Number of Shorted Shares?

    For general shorting information, you can usually go to any website with a stock quotes service. 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. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
  5. 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 >>
  6. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Although it is not a requirement set by FINRA or the SEC, brokers will often tell investors that only stocks above $5 can ... Read Answer >>
Trading Center