Short Covering Doubt - Help!

#1
Hello friends, hope you all doing fine, well I am a leaner and in the phase of understanding the market more precisely, recently, I have been studying OI data NSE. I would appreciate if you could help me understand this in the simplest form. :), My doubt is, does Short Covering always means a Bullish?? As per my understanding, I.e if Mr X is bearish on Nifty and sells 8100 call (Nifty at 8000) but the market turns bullish, to avoid losses he buy backs the position (completes his trade). Now that he has bought the Call, means Buying has been done, buying means bullish, calls are in demand....but on a contrary Mr X is Bullish and sells Put 7900 (Nifty at 8000), Market falls, he buys back the Put he had sold to cut losses, Buying has been done but Put has been bought, Demand of put increases, does that mean the market will fall since the puts are on demand?? But short covering always seems to be bullish, how? I am Confused! I hope u all got my point, thank you.
 

travi

Well-Known Member
#2
All instruments afaik when they rise (ie. Long positions) are Bullish. When anyone "Shorts" an instrument, that is a bearish position.
Instruments considered here are EQ, Futures, Calls.
If the above witness short covering, then spot is rising.

The only exception is in the case of Puts, which work inversely by design. That means when the underlying (spot) goes down, Puts value rises.
Therefore, if Puts witness short covering, then spot is falling.

So, short covering is always bullish because its is always used in context of the spot (implicitly) and not in context of puts unless "explicitly"stated.
 
#3
All instruments afaik when they rise (ie. Long positions) are Bullish. When anyone "Shorts" an instrument, that is a bearish position.
Instruments considered here are EQ, Futures, Calls.
If the above witness short covering, then spot is rising.

The only exception is in the case of Puts, which work inversely by design. That means when the underlying (spot) goes down, Puts value rises.
Therefore, if Puts witness short covering, then spot is falling.

So, short covering is always bullish because its is always used in context of the spot (implicitly) and not in context of puts unless "explicitly"stated.
Thanks Travi
 
#5
I would appreciate if more traders put light on this
Whenever there is a lots of short positions in a particular instrument (Stock,Futures or Options.) There will be a point when there are no more selling can be done as Buyers step in and feel that they are getting a good price and they absorb all the selling. Now since the price keeps going up the sellers are afraid and they start squaring off their Short positions (Short Overing.)This inturn fuels the upward rally along with long buyers and short covering the rally will be swift and fast. Hope I was able to convey it.
 

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