With BlackBerry (NASDAQ:BBRY) stock over 30% shorted, many people are in disbelief. I continuously read comments stating "the shorts will get crushed", "cover now before it's too late", " the squeeze is coming", and this has made me think that maybe, there is something else at work here. It would be arrogant and naive to believe that so many investors are shorting the stock as a call on being bearish or bullish. As analytical thinkers we usually think in terms of black and white, with little room for the grey area in between. With over 30% of the stock shorted, there are many sophisticated non-retail investors in the game.
I started to research the short data for the past year, and to see if there was any correlation with other metrics. In a black and white world, when the short interest increases the company usually is not doing well and is represented by a fall in the share price.
Shorting the Box
Historically, if the investor had a long position, the physical shares were kept in a safety deposit box at the bank. If the same investor then took out a short position, they would in fact be shorting their own box. Why would you want to do this? It essentially would lock in your profit or loss position. For every dollar gained on the long side, a dollar is lost on the short side, and this is true for the reverse situation also.
Let's look at the data for BlackBerry in the last 12 months.
In the first section of the graph, the price follows a typical inverse relationship with the short interest as more investors short the stock on negative sentiment. The second section on the graph is fairly neutral as most investors are awaiting news on the new product line for BlackBerry.
Now, in the third section on the graph is where we see an interesting trend. The short interest is going up with the share price. The share price is rising on bullish news that BlackBerry will be releasing its new BB10 line of phones, as one would expect. But the short interest is still rising and one would expect on bullish news that the short interest at a minimum would stay the same.
For the mathematically inclined we can see this trend easier by looking at the rate of change of the short interest, or how fast the short interest is rising compared to how fast the share price is rising.
Starting at the end of October to the end of the year, the short interest increased significantly. In the middle of December the short interest increased the most compared to the last 12 months. I do not believe this is a coincidence and that the short interest was a result of bearish sentiment in this range. The reason for this is that the trend did not continue to January 31st, which was the BB10 launch date. The trend stopped in a new tax year.
At the end of 2012, the share price had doubled resulting in large profits. At this time the federal government was looking at increasing tax rates and there was much uncertainty in the tax situation. By "Shorting the Box" profits were effectively locked in, without realizing any capital gains. The capital gains could be deferred until a favorable tax situation would develop and at the minimum defer capital gains for at least another year.
As an extension to this strategy, the use of options can also be used to assert positions. As the point of this article is not on options and the subject matter is complex I will defer the discussion on BlackBerry options trading. The only point I would like to make is that there is some significant options activity recently with the BlackBerry stock.
This situation with BlackBerry shares is complex, and the point of this article was to illustrate that there are many factors that contribute to the stock's volatility. Sometimes it appears obvious why the shares are shorted, but sometimes we need to scratch below the surface a little.
This is not to say there is not a significant short position. But it would be unwise to attribute the whole short position to bearish sentiment. Some bulls are short, simply to lock in their long positions.
This would also support the argument for why we are not seeing the short squeeze occurring. It may very well occur, but in my opinion it may be more gradual and over an extended period of time.