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…
While theoretically, the value of the underlying is what should drive how the F&O contracts move, in reality, it is the other way around. This is because most trading today happens on F&O and within that mostly in Nifty and Banknifty. Any long or short pressure on Nifty F&O and their price moving away from the theoretical price based on the underlying means that arbitrageurs jump in and ensure the underlying catches up. So if say Nifty is at 17000 and say there is a lot of selling pressure on Nifty future, when the future drops, arbitrageurs will buy the Nifty future and short the Nifty index (all the 50 stocks) and thus the Nifty index also drops. Shorting the 50 stocks of Nifty can be done either by selling existing holding or by borrowing and selling from the SLB platform (which isn’t very active). So the former is the more popular way. This works similarly in stocks as well.
Yes. whatever @nithin said. And I am pretty sure, this is attempted by some - by just chasing the futures with top 5. Nifty top 5 accounts for 40% weightage. BankNifty top 5 accounts for 85%.