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When talking about short interest, the 'Days To Cover' is the avg number of days it will take to cover the short position and bring the short interest to 0. But is this figure actually of any use? It is calculated by dividing the short by the avg daily vol to get the # of days. But avg daily vol is not written in stone.

If share prices rise, all shorts can be covered by the short seller immediately, right? If I hold 500 short shares and avg daily vol is 100 shares, that does not mean I am allowed to cover only 100 shares a day. I can buy 500 shares instantly. So is this 'days to cover' really an indicator that a short squeeze will happen?

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  • In some cases, apparently not. I forget which stock it was, but a few months back I was looking at short interest reported for a stock and noticed it went down a drastic amount between two reporting periods... then when I looked at total volume for the stock in that period it was less than the decrease in short interest - so somehow short interest was drastically reduced outside the market and without affecting share price.
    – user12515
    Commented Jan 26, 2016 at 17:09
  • If the daily volume is 100, are you absolutely sure you can buy 500 instantly? You'll be digging into some pretty high offers, and eventually there are no more offers and the stock is no longer liquid. Market makers are only required to sell up to a certain volume. Limiting case: you can't expect an order for 100% of the stock of the company to be satisfied by the market instantly, or else takeover admin would be trivial. So yeah, if you have obligations to deliver 5x daily volume maybe you have to start thinking about your liabilities, if the market doesn't oblige.
    – Steve Jessop
    Commented Jan 29, 2021 at 21:42

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SeekingAlpha has an article about short squeezes that states:

The higher the number of days to cover means the possibility for a short squeeze is greater, and the potential size of the short squeeze is also greater

Logically, this makes sense. A short squeeze occurs when a lack of supply meets excess demand for a stock, so the potential for a squeeze increases when supply and demand begin to get out of equilibrium. Think of two things that would cause the days to cover to increase and what effect they would have on supply and demand.

  1. The current short interest (numerator) increases. This implies that if some event triggers short sellers to cover their position, there are a higher number of short sellers who will need to do so. This heightens the chances that demand will exceed supply.

  2. The average daily volume (denominator) decreases. This implies that fewer investors are trading the stock, so if an event triggers short sellers to cover their positions, there might not be enough traders in the market willing to sell their shares. (Obviously, if a short-squeeze occurs, volume may increase because traders who were unwilling to sell their shares become willing).

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