How does short covering happen in nifty index?

Nifty & Bank Nifty discussions
21

Thanks @Nidal for a quick response. This other post and answer by @nithin clarifies few things.

So let me summarize what I understood:

  • Speculation/hedging leads to change in call or put option pricing
  • This in turn effects future pricing given the formula (Futures Price = Strike + Call Price – Put Price)
  • This leads to arbitrage opportunities between spot and future price differential
  • Big players use this opportunity and impact the spot price by selling/buying the underlying equities (all of them or the top few). This is how we see index spot moving
  • As an example, during short covering, call option price shoots up thus increasing the future price. Arbitrage gets created and people short sell future and buy underlying spot.

Did I get this right?
I mean seriously, identifying this kind of arbitrage and acting upon it is possible for big institutional players only.

22

When we have a strong clue about decline of price of stock, then we sell a stock from portfolio to the broker and after this price decline and we rebuy same stock in same amount but we have to pay somewhat low, it happen when we want close an open short position.