Does change in F&O effects overall index?

We all know that
Change in stock price changes price of index, and change in price of index changes Options and Future prices.

But is it true vice versa?
If not then what’s the logic behind short covering.

Short covering happens only in F&O, then how come it effects the index?

In simple words what I am trying to say is that one can only cover their shorts in F&O, not in Cash, then how come it affects index?

I am kinda confused.

@ShubhS9 Can you please clear my confusion. It will help me a lot.

What is the Index?

What/how does the index moves?

if you answer these question you will get your answers. It’s the classic chicken/egg problem.

What is index= An average price of a particular collection of stocks.

How does the index move= When stocks goes up index goes up.

I still can’t figure out. :sweat_smile::sweat_smile::sweat_smile:

Let’s assume that short covering happens in futures which drives the futures price up. Now, there is a concept of fair value of a futures contract and when the futures trades at a price greater than fair value, it gives arbitrage opportunities. Arbitrage here would be to short futures and buy in cash, until no more arbitrage is possible.


Short covering simply means to cover your losses (to buy back). I don’t think anyone will think of arbitrage when they are in losses.

Even to arbritage in cash they would need 10× of capital deployed in Futures, as we know Futures are leveraged more than 4×.

I don’t think arbitration is the reason of sudden spike of prices during short covering.

Market makers ,BOTs, Algos, Arbitragers,HFTs makes the price move and make the balance when there is imbalance in price on options, fut, cash. Every thing is interconnected. These happens in nano secs . 60-80% of trades are Automatic .So everything affects every other things until balance is maintained. Don’t mix or miss interpret with fut discount/premium( thats also imbalance caused which can’t be filled but its filled over the period till expiry)

Makes sense

Please correct me if I am wrong.

So when big guys start covering their shorts and prices of options and Future start to move up then computers start to buy regular stocks to balance the index with future and option prices?

Is this what you are trying to say?

Yes, even big guys have complex hedges in order to avoid deltas (slippages) . if they are buying in fut they will have hedges in options or cash or they will simultaneous buy equal quantities in fut and cash or in ratios in order to avoid slippages. Every slippages and price discrepancy is loss of big player and gain of these Arbitragers , HFT , Bots , Market makers etc. Hence to avoid such slippages they themselves have hedges which compensates these slippages.

Nothing matters who’s doing what, or whatever news bullshit etc,… the chart says it all, study/backtest/follow your rules and have proper SL/money/position management, everything else will fall in place.