Derivatives

F&O Tracker: Short covering in indices?

Akhil Nallamuthu |BL Research Bureau | Updated on: Jun 18, 2022

Following considerable short build-up on both Nifty 50 and Nifty Bank futures between June 6 and June 10, both the indices depreciated last week. Nifty 50 lost 5.6 per cent to end at 15,293 and Nifty Bank lost a little over 5 per cent to close the week at 32,743.

However, last week, we could observe some variation in how market participants have positioned themselves in both the indices. That is, there has been short covering on Nifty 50 futures but short build-up on Nifty Bank futures.

Notably, both indices witnessed a significant amount of short build-up on Thursday and short covering on Friday alike. But on a weekly basis, Nifty 50 futures has seen a drop in outstanding open interest whereas Nifty Bank futures has seen an increase of the same, showing divergence between themselves.

The cumulative OI on Nifty 50 futures on the NSE dropped to 133 lakh contracts on Friday versus 137.2 lakh contracts a week ago. Here, the OI has dropped along with price drop, showing that shorts are being liquidated. Nevertheless, this is not a bullish reversal although participants who are short should be cautious.

On the other hand, the cumulative OI on Nifty Bank futures increased to 31.4 lakh contracts on Friday as against 30.1 lakh contracts by the end of preceding week along with price drop. This hints at a short build-up.

Given the above factors, we suggest traders stay direction neutral. Meaning, adopt strategies like long straddle and long strangle since there is a chance for a corrective rally from here following last week’s short covering.

Send your queries to derivatives@thehindu.co.in

Published on June 18, 2022
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