Options Spotlight: Short Interest

This week’s edition of Options Spotlight takes a step back from the usual brisk option trading to look at 1 of the key indicators that I use when examining sentiment toward a security.

Short interest can be a useful sentiment indicator, since it measures the level of investor pessimism toward a given stock. Specifically, short interest is created when an investor sells shares of a stock that he or she has borrowed from a broker, but does not own outright.

A basic short-selling strategy is profitable when the price of the shorted stock declines, allowing the investor to buy the stock back at a lower price in order to replace the borrowed shares.

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