I am not able to get technical/logical reason behind following scenario. Can you please help me to explain the reason behind it?
Context:
Group of stocks makes the index. It means Index is dependent on stocks, right?
Index future is dependent on Index. Also, Index PUT & CALL options are dependent on Index.
Confusion/Question:
When we say there is short covering in CALL options, then index moves upwards.
And when there is long unwinding in PUT options, then index moves downwards. I’ve heard this, and also experience this.
But how index PUT and CALL options writing/unwriting affects index ( internally stock prices)?
Index and PUT/CALL options are separate entity. There can be premium/discount compared to index. But how they can affect index price?
I’m not able understand technical/logical reason behind it.
The question is good. The person who explains this need to know the intricate details of all this and moreover to explain it in simpler way. I am also a leaner and wanted to know this. Thanks for asking this.
To be clear the Price movement of Future & options depends on the price of underlying (i.e stocks and index.)
By the above statement you can simply say that the buying or selling in stocks will affect it’s future and options (option writing or buying) which will then affect the movement of nifty index which in turn affect the future and options of nifty index.
Option contracts doesn’t decide the movement of index but it the movement of index that helps traders to decide whether they going short or long on nifty thus whether to write or to buy any particular option contract/strike price.
If FUT is trading at a premium then you can buy Nifty ETF and sell futures. Selling futures will decrease price of FUT and buying of ETF will increase the price of the ETF thus making the market maker of the ETF buy the constituents of the index increasing the price of the underlying. Your small capital won’t have any such effect and the premium will keep existing.
