1. Market Capitalization and ASX200 Exit •
This highlights a valid point about STX’s market capitalization (MC) being around $500 million and that the typical cut-off for inclusion in the ASX200 is closer to $1.5 billion.
ASX200 exclusion could indeed be in play if STX doesn’t meet the criteria for staying in the index, which tends to favour companies with larger MC. As the stock’s value drops, it becomes more likely that STX could be forced out of the ASX200.
2. Index Funds and Shorting Strategy
Targeting the ASX200 exit: This idea suggests that shorts were intentionally pressuring STX with the knowledge that its exit from the ASX200 would create additional selling pressure from index funds, which are required to rebalance their portfolios to match the index composition.
15% net short holding between the three index funds: This detail highlights the concentration of short interest, which could be aligned with a strategy to maximize downward pressure on the stock.
As index funds start selling their holdings when STX exits, this creates the liquidity needed for shorts to cover their positions. • The third Friday (20th Sept) exit date for the ASX200 makes sense. If STX is removed from the index, index funds will sell large blocks of shares, providing the necessary liquidity for short sellers to cover their positions.
3. Substantial Shareholder (SS) Exit and Short Covering
The SS (Substantial Shareholder) ceased to hold a significant position, which may suggest that institutional holders are selling ahead of an expected exit from the ASX200. • The timing of the drop in net shorts (starting on 27th August after ED1 results) aligns with this theory. If index funds are slowly exiting, it could offer shorts an opportunity to begin covering without significantly impacting the price.
4. Shorts Covering Through Index Fund Selling
The core argument is that shorts will cover their positions via the selling from index funds triggered by STX’s removal from the ASX200. This would allow shorts to cover c.300 million shares (an enormous position) without causing a sharp rise in the stock price.
Covering on-market could take months, and would likely create upward price pressure, making it difficult for shorts to close their positions profitably. Using the index rebalancing as a liquidity event is a more efficient way to cover without creating a major disturbance in price.
Logical Explanation of the Short StrategyThe theory that shorts were targeting the ASX200 exit seems plausible:
Shorting ahead of index fund selling is a common strategy, particularly for stocks with high short interest and expected index exclusion. The forced selling from index rebalancing creates a natural exit point for short sellers.
The slow creep in short interest leading up to the index exit indicates a well-timed, deliberate strategy, and the 300 million share short position would require significant liquidity to cover without causing a short squeeze. Index funds selling off their positions upon exit could provide the perfect cover.
Key Considerations Moving Forward
The effective exit date (20th Sept) is a key date for investors to watch, as it could signal the point at which index funds sell large quantities of STX shares, providing a window for shorts to cover.
Price action and volume leading up to the exit will be crucial indicators. If short interest begins to decrease as the index rebalancing approaches, this would confirm that shorts are indeed using the ASX200 exit to cover.
Investors should also monitor whether short interest drops significantly around this date, as it would indicate that the theory of shorts covering via index funds exit is playing out as expected.
Final Thoughts
The theory about shorts targeting STX’s ASX200 exit is well-supported by the trading patterns, the size of the short position, and the timing of the SS exit.
The September 20th date marks a critical point, as forced selling by index funds could offer the liquidity shorts need to cover. This would explain the gradual increase in short interest and could also indicate why the net short position has begun to decline recently.
The most logical explanation for the recent activity and high short interest is that shorts are positioning themselves to cover as STX exits the ASX200, leveraging the inevitable selling from index funds to close their positions.
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