Short sales on the TSX: What bearish investors are betting against

As of March 5, S3 Partners data shows elevated short interest across select Canadian stocks and ETFs, with energy ETFs having the highest percent-of-float sold short and several names flagged as high short-squeeze risk by S3’s Short Squeeze Score. Notable examples: Obsidian Energy is up ~50% YTD despite heavy shorting, Andean Precious Metals rallied >500% over the past year while short interest remained high, and NexGen rose >10% after a Feb. 6 activist short report; Barrick faces higher costs and lower production and has seen rising short positions. The report emphasizes S3’s currency-adjusted, percent-of-float methodology and argues short sellers provide market-discipline benefits, while noting short positions can also reflect hedging or arbitrage.

Analysis

High cross-border short interest and the creation of synthetic longs materially amplify gamma risk in names with concentrated float. When synthetic long positions exceed ~10–15% of advertised float, daily flows from option dealers and recall risk can produce outsized intraday moves even absent new fundamental information. Track borrow rate spikes (>10–15% APR) and short-interest-to-float above 20–30% as practical early warning signals for a liquidity-driven move.

Activist reports layered on top of elevated short positioning create a two-way risk: they increase headline volatility and compress bid-side depth as arbitrage desks and hedge funds hedge away delta. In that environment, 1–6 month OTM call spreads can offer asymmetric upside at controlled cost while selling equity or put premium to finance protection; conversely, outright short equity in these names risks sudden, multi-day mark-to-market gaps. Expect squeezes to materialize in days–weeks around catalysts (earnings, filings, option expiration) and mean reversion in months if fundamental claims are addressed or borrow eases.

For commodity-linked names, short increases often reflect producer hedging rather than pure speculative bearishness; pairing equities with the relevant futures curve (e.g., buying the metal future while shorting the equity) isolates commodity upside from company-specific execution risk. This strategy reduces tail exposure to operational surprises but requires rolling futures and managing basis risk over quarters.

Primary risks to these views are noisy cross-border reporting, misclassification of hedges as directional shorts, and sudden changes in borrow availability from prime brokers. Key reversal triggers are large-scale buy-ins, regulator scrutiny of borrow practices, or a sharp move in the underlying commodity that forces short-covering; monitor open interest shifts and dealer inventories daily during stress windows.

Key Decisions for Investors

• NXE — Buy a 6-month OTM call spread (size = 0.5% NAV): buy nearer-term 25% OTM calls and sell higher 60% OTM calls to cap cost. Rationale: capture squeeze/volatility re-rating with limited downside (max premium paid) and asymmetric upside if borrow + headline flows compress. Target payoff 3x premium; stop-loss: 50% of premium within 45 days if no vol expansion.
• APM.TO vs B — Pair trade (size = 1% long APM.TO funded by 0.5–1% short B): horizon 3–12 months. Rationale: small-cap precious-metals exposure tends to outperform on metal rallies while large diversified names re-rate more slowly and carry operational execution risk. Risk: basis moves and corporate-specific shocks; cap position if metals fail to gain 10% in 6 months.
• GSY.TO — Buy a 3–6 month put spread (size = 0.5% NAV): buy 20% OTM puts and sell 40% OTM puts to limit premium. Rationale: asymmetric downside protection against credit deterioration among nonprime lenders with limited capital outlay. Reward: limited by strike widths; loss = net premium paid, win if equity falls >20% within term.
• OBE — Tactical accumulation via covered-call ladder (size = 1% NAV): purchase shares on weakness and sell 1–3 month near-the-money calls to fund carry. Rationale: monetize expected range-bound action while retaining upside; unwind if borrow rates spike or industry-wide re-rating reverses. Maintain cash collar if volatility exceeds 35% IV.