MetLife (MET) reports earnings today after the close. Historically, MET moves around 3% post-earnings, but the options market is pricing in a 4% move. While MET’s stock return before earnings suggests a small decline, short interest has surged by 7%—the largest pre-earnings increase seen in years.

MetLife typically moves 3% on average, and the options market expects a 4% move. This is smaller than most companies, due to the stability of MET’s business.

The day after earnings, MetLife’s performance tends to follow the prior week's return. In this case, that return is around 1%, which suggests a small predicted effect of a 1% decline.

The change in short interest is significant this time; the percentage of float shorted is up 7%, which is larger than any previous move in the week before earnings.

The graph shows that this sensitivity is negative, meaning that the shorts are usually correct. A rising short interest is often followed by negative returns after earnings.

In this case, the small stock return effect adds to the larger short interest effect.

Short interest typically increases ahead of earnings, but this time the magnitude is much greater.

MET’s return after earnings has been mostly negative recently, even when the surprise is positive.

The graph illustrates the increase in short interest and the stock's fall, both bearish signals ahead of earnings.

Longer-term, the stock is near the top of its 1-year range, and short interest is also near its peak, showing an upward trend.

Historically, the stock and short interest have been strongly negatively correlated. When the stock rises, short positions shrink as investors cover their shorts, reflecting a momentum strategy. On the way down, shorting also acts as momentum.

This negative correlation is evident in the stock’s decline and the rise in short interest.

MetLife’s stock is approaching earnings with the highest short interest increase in years, a historically negative reaction pattern, and a strong negative correlation between short interest and returns. If past trends hold, this suggests downside risk post-earnings. Traders should monitor short positioning closely for potential shifts after the report.

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