What is Long / Short / Long unwinding / Short Covering?
Understanding how investors position themselves in the market is crucial for navigating the stock market effectively. This guide dives deep into four key concepts: Long positions, Short positions, Long unwinding, and Short covering.
Creating Positions: Understanding Long and Short Positions
Long Position
A long position means that an investor buys a stock, betting that its price will rise in the future. This allows them to sell it later at a profit.
Example: Imagine you’re at the market and see a company like Infosys (INFY) with promising growth. You believe its stock price will rise in the future, allowing you to sell it later for a profit. Buying a stock is called being long. You’re essentially saying, “I’m bullish on INFY and expect its price to go up. I’m buying now to sell later for a profit.”
Short Position
A short position means that an investor believes a stock’s price will decline. They borrow and sell the stock, planning to buy it back later at a lower price.
Example: Let’s say you think Yes Bank (YES) might be overvalued and its price is likely to decline. In a regular purchase, you wouldn’t profit from a falling price. But with short selling (available in the Futures & Options (F&O) section).
How to Create Short Position in National Stock Exchange, INDIA (NSE)
Method 1: Using the Futures & Options (F&O) segment
Check NSE F&O Availability: The first step is to verify if the stock you want to short is traded in the NSE’s F&O segment. You can find this information on the NSE website for List of underlyings available in derivatives
Short Selling in F&O: If the stock is available in F&O, you can directly sell its futures contract. This essentially means you’re agreeing to sell the stock at a predetermined price on a specific future date (expiry date). If the stock price falls before expiry, you can buy it back at a lower price, fulfilling your contract and profiting from the difference.
Method 2: Borrowing and Short Selling in the Spot Market (For stocks not in F&O)
Borrowing from SLB: NSE offers a Securities Lending and Borrowing (SLB) facility. You can check for available stocks on the NSE website for stocks in lending and borrowing segment.
Short Selling the Borrowed Stock: If the stock is available for borrowing through SLB, you can borrow the shares from another investor and immediately sell them in the spot market. This creates your short position.
Repurchasing and Returning Shares: When you decide to close your short position, you’ll need to repurchase the same number of shares you borrowed and return them to the lender. Your profit (or loss) depends on the difference between the selling price (when you shorted) and the repurchase price (when you closed the position).
Exiting Positions: Long Unwinding and Short Covering
Long Unwinding
Long unwinding means that a long investor decides to sell their shares. This can happen for various reasons, such as profit-taking, risk management, or a change in market sentiment. When many long investors unwind their positions simultaneously, it can put downward pressure on the stock price.
Short Covering
Short covering means that a short seller buys back the borrowed shares to return them to the broker. Short sellers may cover their positions if the stock price starts to rise to avoid further losses. Short covering can actually cause the stock price to rise further, as the increased demand for the shares creates upward pressure.
Identifying Market Sentiment Using Positions (Long / Short / Long unwinding / Short Covering)
It’s not always easy to know exactly what’s happening in the market, but there are ways to get clues. Here are a few indicators:
Price movement means the changes in the stock price over a period. A significant price movement, generally more than 2% in either direction, can indicate a strong trend. This movement can be positive (upward) or negative (downward).
Open interest means the total number of outstanding contracts in the futures market. It reflects the level of activity and investor interest in a particular asset. Significant changes in open interest—whether positive, negative, or neutral—need to be closely monitored as they can signal shifts in market sentiment.
The spot vs. futures spread means the difference between the current spot price of an asset and its futures price. If the futures price is higher than the spot price, the market is said to be in contango, or trading at a premium. Conversely, if the futures price is lower than the spot price, the market is in backwardation, or trading at a discount.
Interpreting OI Changes
Here’s a table to help you interpret OI changes:
| Price Movement | Open Interest (OI) Change | Interpretation |
| Price Increase | OI Increase | Fresh long positions, bullish sentiment |
| Price Decrease | OI Increase | Fresh short positions, bearish sentiment |
| Price Increase | OI Decrease | Short covering, rising price |
| Price Decrease | OI Decrease | Long unwinding, falling price |
Advanced Insights, For more advanced traders, including the Spot vs. Futures Spread can give deeper insights:
Price Increase + OI Increase + Low/Decreasing Spread: Indicates fresh long positions and bullish sentiment.
Price Decrease + OI Increase + High/Increasing Spread: Indicates fresh short positions and bearish sentiment.
Price Increase + OI Decrease + Decreasing Spread: Indicates short covering, potentially due to a rising spot price.
Price Decrease + OI Decrease + Increasing Spread: Indicates long unwinding, potentially due to a lack of confidence.
Remember: This is a simplified explanation, and other factors can influence price movements. OI analysis is mainly applicable in the futures market, and option markets require a different approach (beyond the scope of this guide).
By understanding these concepts and how to interpret market signals, you’ll be better equipped to navigate the Indian stock market and make informed investment decisions.
Understanding long and short positions, along with concepts like long unwinding and short covering, is essential for navigating the Indian stock market effectively. By mastering these concepts and interpreting market signals, you can make more informed investment decisions.
If you want to dive deeper into stock market analysis and gain comprehensive knowledge, consider joining our course. For any specific questions, feel free to submit them and receive feedback directly from Valarmurugan, a SEBI Registered Research Analyst.