Can some one explain how short covering and long unwinding in future and option price impact the spot price movement.
As far as i know future and option price mimicing the spot price of a scrip. So as per this logic Spot price movement imapact the Fno price.
many time from news i listened due to short covering spot price moves higher
During a short-covering, you would have to buy back the underlying to exit your position. But when short-covering is to take place, because of the market moving against the shorters. The contract sellers know that you are in a hurry to exit that position. So they exploit this situation and raise the spot price of the contracts.
If this short covering is small, the price of the underlying would not shoot up too much. But if a very large number of open interest was sitting short on a particular level, and the market moves against this group. There will be a large sudden spike in demand for exit positions, and shorters would pay a good sum to get out of their position. This causes a sudden rise in an underlying is known as a Short Squeeze, also Breakout.
Long Unwinding, is the opposite when bulls were expecting the underlying to climb more from a level, but the market reverses sharply in the opposite direction and decides to stay there. There is no demand for those long contracts anymore and the spot price for contracts at those levels becomes very low. The Bulls holding these contracts would either exit at whatever little price they are getting or simply let it expire.
Of course, there are many more factors involved but I have tried to share just the overall gist of the mindset that takes place in pricing these contracts.