How would you use short sales data and options call and put open interest to make a decision to buy a stock?

Answer 1

Actually, and to expand on the answer submitted by the individual above, the paper by Paul Asquith (MIT) and Lisa Meulbroek (Harvard) is one that suggests that you can do well by shorting stocks with the highest short interest ratios.

If I were you, I'd ignore trying to use put and call ratios as indicators of whether a company is a good short sale candidate or not. Simply put, that data is readily available to everyone, and if there were a meaningful relationship there from a forecasting standpoint, other short sellers would have already picked up on it and it could be proven statistically as well.

If you're looking for a predictive relationship between a company's short sale ratio and whether the possibility of a short squeeze tends to make the stock overperform, you're off track. That relationship doesn't exist, though just the opposite relationship does exist among the small number of companies with the very highest short sale ratios as documented by Asquith and Meulbroek.

By the way, and just so you know ahead of time, the paper by Asquith and Meulbroek isn't exactly light reading. If you don't have a couple of semesters of statistics under your belt, you'll find it tough to absorb.

Hope this helps.

-- hh

Answer 2

There is a paper by Asquith and Milbreuck (I just know I butchered the spelling of her name) about short sales. They show that, on average, shares with a high short interest end up under performing. It's been ten years since I read the paper -- so don't remember all the details. They looked at a certain time horizon and showed that the more shares were short, the greater the under performance. I believe it was published in the Journal of Finance a few years ago. Asquith is at MIT. You may be bale to find reference to it on their web site.

It is a little harder to make predictions with options -- because for every optimistic buyer you have a pessimistic seller.

Answer 3

People buy calls when they expect the stock to rise.
Likewise, people buy puts when they expect the stock to fall.

If I dabble in options, I usually stick to actually buying a call or put. But I would think that you would use what you are talking about to identify trends in what the general public is doing. Options are very risky, so I would hope that people are doing their homework before buying one. In other words, if you saw a lot of calls being bought, perhaps you would want to jump on the band wagon and buy it too.

But really, I would just do your homework on a good quality company/stock and just buy that. Taking what other people do as a reason to do yourself doesn't seem like the best way to buy to me...