Short Interest Warning. Many investors either don't care about short interest, or care too much. What the vast majority don't understand is there can be a hidden landmines in the data.
The superficial theory is that a large short interest may have to be liquidated some day, and that will drive up the stock significantly if it happens. Recently, several stocks did just that, as investors "forced" it to happen. Also, many investors see a significant short interest in the stock and assume that there are investors lurking around the stock trying to drive the stock down or at least hoping that it will go down. And that can happen.
But most of the time neither of the above is true, nor will it be. Why? There are two major other reasons for short interest, neither of which contribute to the above scenarios.
First, companies that have convertible bonds outstanding will also have a significant short position existing. And this short position will never have to be covered, nor will it necessarily result in open market purchases of the stock that would drive the stock up. The holders of the bonds also hold the short positions. They cover the stock that is due on the short position by converting the bonds into stock, and they use those shares to pay off the short shares owed. The short position disappears, with no direct impact on the open market price.
Why do convertible bond holders have short positions? When they supply the convertible debt (let's say $100 million at a 5% interest rate -- for a $5 million a year interest payment), they do not want to put up the full $100 million, and they want better than a 5% yield. So they short the stock by selling it at the same time! Let's say they sell $50 million of stock and use the proceeds towards the $100 million they are giving the company. So their net investment is only $50 million, and they are earning $5 million a year on that, or the equivalent of a 10% return. Ahh, but you are going to say that they will have to pay interest for "borrowing" the stock they sell. Assuming for the moment that they have to, their borrowing cost should be really low because they have access to stock to cover ("collateral" in the converible bonds)and that stock is derisked if the price goes higher than the conversion rate (the real risk of a short position). Net, net they still make out enough to want to short stock when the company issues convertible debt.
In fact, they may not need to borrow from someone else, because they can convert the stock (at whatever conversion rate) to supply the stock, if it is needed. A number of factors then come into play (conversion rate vs. current stock price, a contingency for borrowing a small portion if suituations change, ability to short more if the stock price rises closer to the conversion rate, or goes over, etc.) I am not an expert, so can't estimate exactly how much stock is shorted, but you can see the short positions go up when convertible debt is issued by a company. In this case the issuer of the convertible bonds (the company) is the "evil doer" because they trigger the initial short selling that hampers their stock price.
The second reason short positions may exist without necessarily being associated with "evil shorts" is due to the options market. Options market makers must take a short position when someonee buys more puts. If someone is buying and selling puts as a "trade", then yes, there would be an impact on the stock prices as market makers have to adjust their short positions. The effect can be muted, however, by buyers who buy one put and sell another lower-priced put against it, significantly reducing the need for the market maker to actually sell shares short.
More importantly, a lot of puts are initiated by existing owners of the stock who are simply hedging their positions for a period of time. This may cause the market makers to short the stock (perhaps not 100%, depending on strike prices and duration, or even alternatively taking out a semi-balancing put, or selling some calls, etc.). If they do short the stock, the short sale position is a one-time event randomly selected by the owner of the stock. The duration may vary depending on circumstances, so the short position will be retained until that point (i.e., no immediate "squeeze" will take place because they won't be forced out of their position until expiration day, or the original client changes their mind and sells back the put).
Their puts may also be closed out at expiration by the owner of the stock giving up their stock at expiration (as required by the put if it is not closed out before expiration!). If so, the options maker doesn't have to buy stock on the open market to cover the short -- they have the stock from the original owner of the hedged put.
These are just some thoughts to help realize that short positions are not always intended to drive down the price of a stock, nor can they always be squeezed out, nor can a price increase be easily achieved for some shorted stocks by attempting to squeeze them out. YMMV
