Relation of underlying's sentiment with Future Contract's status?


Let’s say the Future of an index is in Long or Short Covering status.

Now this could mean two things:

  • Traders might have a directional upward move of the underlying index. Hence, they are buying future contracts.
  • Traders might be using the future to hedge against the underlying index as they think that the underlying might do down.

Am I missing something here?

I’m confused about this. Based on the Future’s status (Long, Long unwinding, Short, Short covering), how can we know what is the market’s sentiment about the underlying index?

The relationship between Future(F) and underlying(S) is the cost of carry of the position. Or simply said, if you borrowed money using current repo rates, how much you would need today so that you can buy the future at expiry.

This relationship is exploited by arbitrage funds to give cash returns with equity taxation. It is important to note that the taxation feature is due to IT laws applicable only to mutual fund vehicles so individual investors cannot do this in their demat and get similar taxation.

Coming to your question - the idea is simply that if volume of unsettled futures (OI) is increasing along with price, it means more buying pressure is pushing the price up. That is could be a bullish signal.