If you are in stock market for a while, and closely following financial news sites, then you might have come across list of stocks listed on these websites with following types of heading;
- 81 stocks saw long build-up;
- 15 stocks saw long unwinding
- 41 stocks saw short build-up
- 60 stocks witnessed short-covering
Have you ever wondered why these financial sites give you this type of information? Well, now you will know why.
In this article, we will explain what is long and short build-up, and what is short covering and long unwinding.
Before getting into long build up, short build-up, short covering and long unwinding, you have to understand what is open interest.
In simple terms, Open interest means the number of open contracts that are held by market participants.
When open interest is high, it means market participants are bullish and are ready to move the market higher. On the other hand, when open interest is falling, it means traders are more bearish and prices may fall lower.
Here are few important points on open interest;
- When new contracts are entered into the market, open interest rises.
- Open interest does not change when contracts are traded between two parties.
- When Open interest decreases, it signals that market participants have a bearish view.
We have written an article on open interest, you can read that to know more.
What is long build-up: Fresh Long Position
A long position in the financial market means you are buying a stock or any other financial securities with the expectation that it will rise in price in the near future.
This means you have a bullish view on that security and market.
A rise in open interest (OI), along with rise in price, mostly indicates a build-up of long positions. In the market, it’s also referred to as long build up.
In F&O, open interest (OI) is the total number of outstanding derivative contracts, be in options and futures that have not been settled.
Higher number of open interests suggests that the level of interest of investors in a position is high. Similarly, the lower the open interest, the lower the level of investor interest in a position.
If the volume of open interest is very high, then it suggests that the level of bullishness is very high.
What is Short covering: Decrease in open interest with rise in price
Short covering means you are buying the underlying security such as stock in order to close an existing short position.
Short covering is done in order to avoid losses on a short position when the price of the underlying security starts moving upward.
This type of event indicates a shift from bearishness to bullishness on financial security.
What is shorts Build-up: Fresh Shorts
Short position is a bearish view on financial security such as stock or the index.
A fall in price, along with rise in Open Interest (OI) mostly indicates a build-up of short positions. It’s referred to as short build up.
When fresh shorts are built, it indicates that market participants are selling the underlying security expecting a price fall in the value of that security.
In F&O, high open interest suggests a higher level of bearishness on that security or the index.
What is long unwinding: Fall in Price with fall in open interest (OI)
Unwind means selling or closing a position. Market participants prefer to sell their positions or stocks owned for a longer period either to book profit or to exit in anticipation of bearishness. It’s referred to as long unwinding.
This means, long unwinding happens when market participants feel the price of the financial security or the index is nearing its point of resistance or they are not bullish on it.
Long unwinding results in decrease of both price and open interest in the market.
Where do you get data related to open interest?
If you are in the stock market for a while, then you might have heard of Option chains.
Option chain maintained by NSE is a listing of all the call and put options strike prices along with their premiums for a particular maturity period.
In addition to other information the option chain chart gives followings valuable information;
- Volume: it shows how many options got traded on a particular day.
- Open interest (OI): It shows how many options are outstanding on that day.
The open interest in particular at any strike price shows the level of investor interest on that contract. By analysing call and put option contract’s open interest level, market participants get a general view of the market in the foreseeable future.
