Short Covering is closely related to Short Selling.
Short Selling: When a trader sells any stocks, expecting a price decline so that he can buy it back at a lower price.
This is done to make profits when the price is declining or to hedge the positions.
Short covering: when he buys those shares back which he Short sell, to square-off the position.
So when short sellers start buying to square off their position, which will result in a price increase for a short term
You can take short positions in the Cash market & F&O Segment also
A decline in open interest and an increase in price indicates a short-covering and those price rally is a temporary phenomenon.
you can not square off between futures & cash (even though on the underlying)
you can only hedge against each other. Square off position is always in the same segement (either cash or futures)
Fund mangers who hold equity in a long term porofolio may trade index futures, sell options to generate income etc .
Though I don’t understand FnO trading, one thing I’d suggest you do is ignore that bit about the FnO tracking the underlying. Things can seemingly get out of whack in the short term. At least that’s my observation.
Also, the huge amounts of short covering you see is generally not the intra-day variety. So the news bits are generally talking about FnO overnight positions.
Open to any corrections that seniors might see fit, of course. HTH.
Again, not an expert by any means. But using common sense.
Let’s say, ABC is trading at 10 in both cash & FnO. If there is short covering in FnO, & price goes to 20. Do you think the price in cash mkt. would remain at 10? Folks would try to buy in cash mkt. & sell in FnO. That activity will adjust prices.
That’s why I said it’s best to ignore the connect/disconnect between the underlying & the contracts trading.