InvestorQ : I am told that there is a lot of selling in the futures of Reliance Industries. Does that mean that there is selling pressure on the stock?
Archita Jajjoo made post

I am told that there is a lot of selling in the futures of Reliance Industries. Does that mean that there is selling pressure on the stock?

Answer
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1 year ago


That is not necessary. Selling need not mean that people are unwinding or that people are creating fresh short positions. There is a third angle which is called arbitrage positions. When you see selling in futures you interpret it as selling, especially if there is clear accumulation on the short side. You need to realize that a chunk of the trade in the stock futures market is cash-futures arbitrage. Arbitrage means; large institutions and proprietary trading desks buy the same stock in the cash market and sell in the futures market to capture the spread and lock in the profit. Don’t interpret short accumulation in futures as selling in futures and try to go short on the stock. You are likely to end up on the wrong side, as these are non-directional arbitrage strategies. Ideally, when you see short accumulation on futures, check for two things. Firstly, check if the selling is actually pushing the price down. Secondly, see if there is a sharp rise in delivery volumes on the cash segment. Then it is a clear sign of arbitrage activity.