What is a short covering in futures market?
As the phrase suggests, “short covering” is to cover sell/short positions in derivatives market. In India, much of the NSE listed F&O stocks is where the derivative action occurs. Short covering or long unwinding, are terminologies which depict the interrelationship of futures price of an underlying asset like Nifty, BankNifty or NSE F&O stocks and the open interest of the respective contract.
Open interest (OI) is an important metric in futures trading and is often used together with technical analysis. It represents the total number of outstanding contracts that are currently held by market participants at any given time. It is an important derivative data point.
When open interest increases along with a downtrend in the price of a futures contract, it suggests that new money is coming into the market, on the short side, indicating that the downtrend may continue, SHORTS getting added. Conversely, if the price of a futures contract rises, but open interest is declining, it may indicate that the downtrend is pausing for a while, SHORT COVERING occuring. This is the Short – Short Covering cycle.
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Its important to understand when Short-Short covering cycle or Long- Long unwinding cycle is evolving in the underlying. Be it NSE F&O stocks or Indices.
Using built-up tool, trend navigation gets easier, I think. there is a video which I came across, do refer it? I found the clip interesting, as it talks about how to use Open Interest, coupled with price action of the underlying, which could be any NSE F&O stock or Nifty/BankNifty etc. This has been a strong enabler in crystal gazing ahead, especially for equity derivative traders in India.
