Larry McMillan answers a question from Snowman.
The following post is in response to a question on Short Interest from Snowman. As stated in TradeKing's Glossary, Short Interest is defined as: "The total number of shares of a security that have been sold short and not yet repurchased. Some investors consider rising short interest a near term bullish indicator, since those shares represent potentially imminent buy orders." If short selling is a new concept for you, please read Locogmac Covers Shorts by Nicole Wachs or Frustrated by Getting Stopped Out by Doc Maher. The Short Interest Page referenced below is from Nasdaq.com. To look up Short Interest data on a stock, please click here.
Lawrence McMillan,
Would you please answer a question for me relating to stocks! I have been trying to figure this out for over a year in TLB. I made a mistake by not checking the short interest before buying puts. By my estimates, insiders own 6,770,733 shares, some of which is restricted. Institutions and mutual funds own over 35 million and AEON 29,921,829. The total number of shares is around 72 million shares. How is this possible with only 55 million shares available? They have permission to sell up to 80 million shares with 25 million roughly in the treasury. 12,748,701 shares were sold short on 6/15/08. My source was http://www.nasdaq.com/aspxcontent/shortinterests.aspx?symbol=TLB&selected=TLB. If you would please explain, this I would appreciate it. I ran into it on RBC, ALGN, and other stocks. I do not understand how more shares could be held than available.
--Snowman
Snowman:
You have more or less answered your own question, it appears. The answer has to do with short interest. Let's suppose that there is only one share of stock outstanding in a particular company. But that shareholder decides to loan his share out to be shorted. A short seller borrows that share and goes into the open market and sells it. When he does this, another person buys it. So, at that point there are two shares long (the original shareholder and the shareholder who bought from the short seller). There is also one share short. So, in your way of looking at things, this company would appear to show total shares owned as 2, when the total outstanding is only 1.
For every share sold short, there is a new buyer created. So, you can add the short interest into the other figures of shares owned to arrive (more or less) at the total figures you show for shares owned.
As far as short interest having anything to do with the stock price, or dictating your decision as to whether or not to buy puts, I would say it's relatively meaningless. There is so much arbitrage - both from options, convertibles, and other derivatives (ETFs, futures) - that short interest is not necessarily any indication of potential buying power in a stock. Most of the short interest in any stock is therefore hedged and not speculative.
--Larry McMillan
President
McMillan Analysis Corporation
All-Star Commentator
Larry's previous posts: Trying to Capitalize on a Sell-off and Comparing Historical and Implied Volatility
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Nicole Wachs contributed to this post.
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