Short Interest And Leveraged ETFs

Short interest is a popular metric on Wall Street because it gives a peek into the amount of negative sentiment a stock has. For their part, leveraged ETFs thrive on the directionality short interest can sometimes signal, and offer another tool for leveraged ETF traders to use.

For instance, taking a look at the stocks represented under Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH and Bear 3X Shares DRIP short interest in the extraction industry is, for the most part, on the rise.

According to Yahoo Finance, this holds for Carrizo Oil & Gas, Inc. CRZO, which is showing 22.63 percent against the float, Whiting Petroleum Corporation WLL, currently at 22.55 percent, as well as several others held by the ETF. If your own short-term thesis is in line with this trend, the bear ETF might be the optimal way of approaching that industry.

Conversely, lower short interest can serve as a similar indication on approaching a bullish position. However, little to no short interest doesn’t necessarily mean people don’t think the stock will drop. For one, large-cap stocks generally carry a lower percentage of short interest due to the large number of shares available. Another reason is simply that the risk of shorting certain stocks outweigh the benefit, especially compared to smaller, more volatile companies.

Nevertheless, it is possible to undertake a bullish position contrary to those shorting the stock, especially when short interest is high; for example, the Direxion Daily S&P Biotech Bull 3X Shares LABU and Bear 3X Shares LABD ETFs.

By their nature, biotech stocks generally carry a high percentage of short interest at any given time. As a result, when company or industry news signals potential growth, investors with a short position in these companies might get forced out of their position in a short squeeze. When this happens, buying action is amplified by both traders trying to enter a bullish position and traders trying to close a short position.

When this happens, leveraged ETFs like LABU can take advantage of the clear directionality of the underlying index’s gains.

As with all strategies that incorporate leveraged ETFs, these approaches work best in a short-term time frame.

This article was written in conjunction with Direxion. 

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