In Friday’s trading session, the following five stocks witnessed a build of fresh short positions. Lets first understand how this conclusion is reached that 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.
IndusInd Bank price fell 3.12%, and open interest saw an increase of 26.17%.
Tata Communications price declined 2.54%, and open interest saw a rise of 3.1%.
IDFC saw stock pricing dipping up by 2.01%, and the open interest saw an increase of 3.09%.
RBL Bank stock price dropped by 1.86%, and open interest saw a rise of 9.7%.
Cholamandalam Investment and Finance stock price declined by 1.74%, and open interest saw a rise of 2.53%.
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 is to look 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.
