Short selling allows sellers to profit when a stock price is declining. Short selling means selling a stock that the seller doesn’t own but for which the price is expected to fall. The seller borrows the stock from the broker or dealer, sells it, and gets the proceeds from the sale. After a certain period of time, after the stock price has declined, the seller closes out the position by buying the stock on the open market at the lower price and returns it to the dealer or broker. The difference between the sell and buy price of the stock results in a realized gain to the short seller. If the stock price rises unexpectedly, however, then the short seller loses money because he has to buy the stock back at a higher price. Short interest refers to the number of shares that have been sold short but not yet covered, or closed out.
The above chart shows Caesars Entertainment Corporation’s (CZR) short interest since January 2014. As of October 31, 2014, CZR’s short interest stood at 20,760,207 shares, which is ~37% of its free float. Meanwhile, for companies Las Vegas Sands Corp. (LVS), Wynn Resorts, Limited (WYNN), and MGM Resorts International (MGM), short interest hovers around 2.5% of the free float.
The short-interest ratio is the number of shares sold short—or short interest—divided by average daily volume. This is also known as the “days-to-cover ratio.” Based on the stock’s average trading volume, short-interest ratio determines how many days it would take for the short sellers to cover their positions. The higher the ratio, the longer it will take to buy back the borrowed shares.
CZR’s short-interest ratio stood at 15 days as of October 31, 2014, based on its average volume of 1,359,779 shares. This means that it would take ~15 days for short sellers to cover borrowed positions by buying CZR’s shares. This is much higher than it would be for other casino companies such as Las Vegas Sands, Wynn Resorts, and MGM Resorts. Short-interest ratio for these companies are in the range of two or three days. Covering the short position can be difficult if the short-interest ratio goes beyond eight days.
Investors willing to have a diversified exposure to casino companies may invest in the Consumer Discretionary Select Sector SPDR Fund (XLY) or the VanEck Vectors Gaming ETF (or BJK).