What is DTC and why you still shouldn’t care

I often see people in the daily thread leaving lazy comments about, "Ticker X has short interest of Y%". This is dumb, and you should feed bad about wasting our time with something so useless.

What is short interest

Here we find the first reason why this is dumb comment. Short interest is an incredibly vague concept. Usually you see it reckoned as a percentage of the float, or the shares outstanding, but even this is not a consistent definition. Thinking back to the GME runup there were two numbers being thrown around for Short Interest, 140% and 270%.

The first number (140%) was short interest divided by the *total shares outstanding*. If a company has 1000 shares outstanding and 200 shares have been short sold, this works out to a 20% short ratio. But not every outstanding share is available to trade on any given day. Many will be owned by the company itself, insiders, and institutions that are not legally allowed to sell them without doing a bunch of publicly available (priced in) paperwork. So sometimes you'll see numbers like the second (270%) which use the shares that are available to trade on any given day as the denominator. If only 700 shares are available to the market that will increase the short float to almost 30%.

Trouble is, how do you define a share that is available to trade? If you don't know the definition that was used when calculating the number you're throwing around, then you don't know what the short float number *actually means*. And if you don't know or can't explain it then you shouldn't be wasting our time with it because its meaningless.

What is Days to Cover

There is another way of reckoning short interest that actually does have some validity. Days to Cover is a measure of how many days of trading it would take for every short position to be unwound. This is the total number of shares shorted divided by the average trading volume. That ratio is the number of days on average it would take for shorts to cover. If every short position had to be closed as quickly as possible it would take that many days if every share traded were used to close a short position for short interest by any metric to reach zero. This is at least a little bit useful because you can tell how long an increase in buying pressure from short positions being closed is likely to last.

Why even DTC is not particularly useful

Even DTC can be an inconsistent metric, though, as likely not every short position must be closed immediately (reducing DTC) and the fact that it is taking the average volume means that a single high volume day could easily drop that number substantially. You don't know what's going to happen just because you have access to a single metric which is also available to every other trader on the market -and that includes those with open shorts. Going back to the GME example, even at the height of the short squeeze craze DTC was sitting at just over six days. Six days of average volume to cover and we saw trade volumes that were an order of magnitude higher than that average. Does that mean the shorts covered? Who knows. You certainly don't, even if someone on the internet told you they didn't.

It's probably not a short squeeze

While the concept of a short squeeze is valid, you need to understand that they are incredibly rare events. If you want to make trading them your primary strategy, have fun, but be ready to wait a long time (years) for the next opportunity. You don't know when short positions need to be unwound, and there's no way for you to force anyone to do it involuntarily. You can be sure that they are doing everything in their power to minimize their losses/maximize their profits and you should do the same. Why should we believe that a ticker that is 30% short with a DTC < 1 is going to squeeze? If you can't explain that, then it's not worth crowing about. Nobody cares about your half-thought out conspiracy theory. DFV spent a year building his case and still came within a few months of his positions expiring worthless. Michael Burry almost went bankrupt waiting for the housing market to crash. You don't hear the stories of the ones who lost it all, even if they were right on the premise.

If you've got knowledge of squeeze that is incoming, great, but build a case for it. Wildly screaming, "GME SHORT INTEREST 30%" in the daily is not a case. Shouting "GME DTC 1.4 DAYS" is a little more informative, but ultimately meaningless without further context. Can they afford to spread the covering out over several days? A week? Four fucking months? How many are held by a single entity, and therefore likely to be closed all at once? What is the price doing? Why would they get squeezed if the position is profitable and looks to continue being profitable for the foreseeable future? If you don't know, then nobody is going to care.

No Bullshitting

We have a rule here: "No Bullshitting". "Don't make shit up, and be responsible giving and taking advice. This includes talking about things you don't know about. You should listen, not talk. Nobody wants an ill-informed opinion. Lurk More." Nobody wants an ill-informed opinion. Nobody wants an ill-informed opinion. If you're in the daily thread vomiting numbers that are effectively meaningless in an attempt to pump your pet stock, expect to be (at best) ignored. I know you're excited, and this may be your first foray into the market. Welcome. Lurk more.

submitted by /u/Flying_madman
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