Let’s first understand how this conclusion is reached, whether the stock has seen a buildup of fresh short position or not. To understand it we have to look at what “ short selling” means. When a trader is expecting the stock prices to fall, he may sell the stock without owning that and buy at a lower price, for example, stock XYZ is trading at 100, a trader sells the stocks at Rs 100 and buys it back at Rs 90. He made a profit of Rs 10. Selling the stocks without owing the underlying stock is called short selling.
Coming to the buildup of fresh short positions, when the stock prices move downward and open interest on the counter increases, it is taken as a sign of a short build-up. The signal is considered more reliable if the volume on the counter has also seen an increase as the stock price was declining.
In Friday’s trading session, five stocks witnessed a build of fresh short positions.
Hindpetro dropped by 1.54%, and the open interest saw an increase of 2.36%.SBI Life fell 1.53%, and open interest saw an increase of 1.97%.IOC declined by 1.49%, and open interest saw a rise of 2.34%.Metropolis Healthcare price fell by 1.44%, and open interest saw a rise of 7.34%.
Glenmark Pharma dropped by 1.18%, and the open interest saw an increase of 0.66%.
Also Read: Wipro, Ramco Cements among 5 stocks with long buildup
Some additional checks would help traders in taking better trading decisions as they increase the probability of a follow-up of the upward movement in the stock price.
First, if this long build-up is accompanied by any bearish crossover, which means that whether in the current down move when the open interest has moved up the stock price has moved below its 20, 50 or 100-day moving average. Another couple of points which traders should keep in mind when taking a trade by looking at the matrix of build-up of short positions on the basis of open interest. Also check whether there is any extraordinary build-up of long positions in any out-of-money put option, especially any far-of-the-money out option. That indicates the probability of any informed person taking exposure through options for any possible downside.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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