Short Covering
A short seller buying back shares to return what was borrowed — when this buying piles up, it can push the price higher and lead to a short squeeze.
Short covering = buying back, in the market, the shares that were borrowed and sold short in order to return them
If a stock suddenly rises with no clear good news, part of that rise may be coming from short covering (buying back shorted shares).
In plain terms
Short selling means borrowing shares and selling them first, so it isn't finished until the same shares are bought back and returned. That act of "buying back to return" is short covering.
Covering when the price has fallen means buying back at a lower price and locking in a gain; covering when the price has risen means buying back at a higher price and locking in a loss. It is the closing stage of a short position.
What it tells you
Short covering itself is buying, so when it piles up at once it becomes a force pushing the price up. So even though the short was a bet on a decline, its closing stage (short covering) can conversely create a short-term rise.
When a stock with a large built-up short position starts to rise, short covering can pile up in a chain, sometimes spreading into a short squeeze (a sharp surge).
Formula
Short covering = buying back, in the market, the shares that were borrowed and sold short in order to return them (the closing stage of a short position — this is when the gain or loss is locked in)
What high or low means
If a stock suddenly rises with no clear good news, part of that rise may be coming from short covering (buying back shorted shares). It's a different kind of rise from one driven by improving fundamentals.
A rise caused by short covering loses its fuel once the shares that need buying back run out, so it often doesn't last long.
A surge caused by short covering is not the result of the company getting better. It's a rise created by supply and demand (buying back), not by improved earnings. Even for the same size of surge, what follows differs depending on whether supply and demand or earnings created it.
The timing and scale of a wave of short covering are hard to predict. Betting on the conclusion that "there's a lot of short interest, so it will soon rise on short covering" is risky.
Short interest is disclosed twice a month. However, the filing doesn't say whether a decline in the balance came from short covering or some other reason — the size of the balance and its change are all we know.
Metrics to read alongside
Guides that cover this term
In Stocklore
Stocklore does not cover Short. Instead, it shows insider buying and selling (Form 4) and how institutions changed their holdings each quarter (13F).
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.