Does short covering in nifty options work?

[uday2358]

I have this doubt from quite a few days so please help me get through this.

Let us take a scenario where Nifty is trading @ 10,000 and I have sold a 10,200 CE after looking at the huge OI @10,200 Calls.

Now as the expiry approaches if the markets move above 10,200 the call writers exit their position and the 10,200 CE buyers benefit from this because of the rally caused by short covering.I heard this saying by many youtubers in their daily shows.

Now my doubt is how can the Nifty index go up when the call writers exit heavily as there is no buying of stocks to cause an upward movement.

[uday2358]

And to be clear in what is have asked please refer to this video. Video Link.This video is in hindi.

In this video the trader tells that he took benefit of the short covering.How does squaring off the the positions by huge number effect the index?

[Nidal]

@uday2358

Now my doubt is how can the Nifty index go up when the call writers exit heavily as there is no buying of stocks to cause an upward movement.

Effects of futures & options trading on the underlying asset?

Hey guys! I have this question in my mind since quite a long time… Does trading in Futures & options of an index/equity has any affect on the underlying asset? Eg. If some HNI or FIIs go long on Nifty Futures or Nifty Call Options, will the value of underlying asset i.e. Nifty index have any affect (increase in this case?? Similarly if more people short any equity futures, eg. ITC FUT, will that reflect on the ITC cash market also? Please share your views…

[joyesh]

The answer lies in demand and supply of that particular security. If a large enough player who was short 10200CE (as in your example) decides to cover their position for whatever be their reason, and there aren’t enough sellers, this buyer will continue to bid up until they find liquidity. This could be regardless of the index movement but a dynamic of that particular option itself.

Generally speaking, you will have two large sections of these large players of which one will be typically long puts and short calls whereas there will be the dealer who will take the counter trade by selling puts and buying calls. They maintain a hedged portfolio. To maintain their hedges, they may need to buy or sell the underlying based on how their book looks like. So, it is generally not the case that only one option moves in price whereas the underlying remains where it was because the hedges will need to be re-adjusted when a position is unwound.

Another feature of the markets is that when someone is dumping their positions be it long or short, they will do it at any price where they have sufficient liquidity. It does not matter what is the fair price. So, someone like a retail participant can very easily take the benefit of this kind of moves if they are nimble.

[jashjacob]

When the short covering takes place, the index option at 10200CE premium will move a little more than the said delta-based move if calculate with the change in the spot price. This is what most of them call “short covering” as price jumps up quickly as the sellers at that strike price run for cover.

You will price the open interest for that strike to fall considerably when this short covering takes place.