The short build-up, Long build up meaning and examples: Futures and Options are derivative instruments that are comparatively more complex to trade than trading in the cash segment.
The movement in these instruments is based on different factors like time, volatility, delta, open interest, and more. While you can have a good understanding of technical analysis, it can take a while for you to get a grip on trading in the derivative segment.
In this article, we will bring you one step closer to understanding the derivative segment. Here, we will be covering short build-up, long build up meaning and examples
Short build-Up And Long Build-Up Meaning In The Cash Market
Before moving on to Short build-up and long build in the F&O segment, let us understand these concepts in the cash segment
A long build-up indicates that people are expecting the stock to rise and are buying or going long on the stock. Here the buying can happen in large quantities and the stock can reach an overbought zone.
The reason for expecting the price to increase can be positive news about the company or other positive global factors that have emerged or a combination of both.
A short build-up indicates that people are expecting the stock to fall and are selling or going short on the stock. Since short positions can only be taken on an intraday basis, the impact of short buildups is not very evident in the cash market. Shorting also takes place when the longs exit their existing long position.
Basics You Need To Know
Let us understand a few of the basic terminologies before we move ahead and learn about the long build-up and short build-up.
What Is A Long Position?
A long position refers to an individual buying security with an expectation of its prices increasing in the future. This means that you own the security
What Is A Short Position?
A short position refers to an individual selling a security that they do not own. An asset is shorted with an expectation of its price decreasing in the future.
What Is Open Interest?
To trade in futures and options, you need to enter into a formal contract. Open Interest shows the number of open contracts that are held in the market. It can help you in identifying the bullish or bearish sentiments on a particular asset and also helps in understanding the sentiment in the market.
Short Build-Up And Long Build-Up In The Futures Market
Now that we have understood the basic terminologies, let us now cover the short build-up, long build up meaning and examples in the futures market. One should note that open interest is taken into consideration while identifying build-ups in the futures market.
Long Build-Up In The Futures Market
Long Build-up in the futures market indicates that individuals are bullish and are expecting the price of the underlying asset to increase. Here, Individuals take a long position in the futures market
During a long build-up in the futures contract, there will be an increase in the price of the futures contract and also an increase in the number of open interest for the futures contract. An increase in the open interest would imply that more buyers are coming into the Market.
Short Build-Up In The Futures Market
Short Build-up in the futures market indicates that individuals are bearish and are expecting the price of the underlying asset to decrease. Here, Individuals take a short position in the futures market
During a short build-up in the futures contract, there will be a decrease in the price of the futures contract and an increase in the number of open interest for the futures contract. This means that more sellers are coming into the contract
The information about the price and open interest can easily be accessed from the NSE website. The change in the open interest will be updated at the end of the trading day and depending on the change in the open interest and price you can determine the movement of the underlying asset.
Let us understand buildups in the futures market with the help of an example:
Suppose the Nifty futures are currently trading at 17000 points and the open interest is 10000. Let us see the type of build-up that occurs when the nifty futures and open interest change with respect to the current levels
Market Movement | Future Price | % increase in price | Open Interest | Change in OI | Build-up | Market View |
Current level | 17000 | – | 10000 | — | — | Neutral |
Case 1 | 17340 | 2% | 12000 | +2000 | Long Build-up | Bullish |
Case 2 | 16660 | -2% | 12100 | +2100 | Short Build-up | Bearish |
(Both the cases mentioned above are independent of each other)
Case 1: In this scenario, you can see that the price of the futures contract has increased along with the open interest. This indicates a long buildup and that implies that there is a bullish view in the market.
Case 2: In this scenario, you can notice that, while the price of the futures contract has decreased, there is an increase in the open interest. This indicates a short build-up and possible bearish sentiment in the market.
Short Build-Up And Long build-Up In The Options Market
In an options contract, you can enter the position in four ways. By can taking a long position in a call-and-put option & also taking a short position in a call-and-put option.
Let us now cover the short build-up, long build up meaning and examples for both Call and Put options.
As there are different strike prices in an options contract, the most active strike price will have a series of contracts built up and trading.
The Build-Up In The Call Option
A call option is bought when the price of the underlying asset is expected to increase and a call option contract is written/sold when the price of the underlying asset is expected to decrease.
A long build-up in a call option happens when there is an increase in the premium (Option price) of a particular strike price along with an increase in open interest.
This means that more buyers are expecting the price of the underlying asset to increase to that particular level and beyond. Here the individuals who have taken a long position are bullish on the prevailing sentiment.
A short build-up in a call option happens when there is a decrease in the premium of a particular strike price along with an increase in open interest.
This means that more sellers are expecting the price to decrease to that particular level. Here the individuals who have taken a short position are bearish in nature.
Here is an example of build-up in call option in the form of a table
Let us assume a strike price of 17000 is trading at a premium of Rs 100 and has an open interest of 10000. The current market level is at 16900.
Scenarios | Strike Price | Premium | % Change | Open Interest | Change in OI | Build-up | Market View |
Current Level | 17000 | 100 | – | 10000 | – | –- | Neutral |
Case 1 | 17000 | 110 | +10% | 11000 | 1000 | Long Build-up | Bullish |
Case 2 | 17000 | 90 | -10% | 11100 | 1100 | Short Build-up | Bearish |
Case 1: In this scenario, you can see that the price of the options contract has increased along with the open interest. This indicates a long buildup taking place. This means, there is an expectation for the market to increase from 16900 to 17000 and beyond.
Case 2: In this scenario, you can notice that, while the price of the options contract has decreased, there is an increase in the open interest. This indicates a short build taking place. This means, the expectations of the market going towards 17000 have decreased and there is a bearish view in the market.
The Build-Up In The Put Option
A put option is bought when the price of the underlying asset is expected to decrease and a put option contract is written when the price of the underlying asset is expected to increase.
A long build-up in the put option also means there is an expectation that the price of the underlying asset is expected to fall in near future.
Here the individuals who have taken a long position are bearish in nature. The more interest there is for a particular strike price, the more Open interest will also increase for the same.
Selling (or short build-up) in a put option happens when there is a decrease in the premium of a particular strike price along with an increase in open interest.
This means that more sellers are expecting the price of the underlying asset to increase in near future.. Here the individuals who have taken a short position are bullish in nature.
Here is an example of build-up in call option in the form of a table
Let us assume a strike price of 17000 which is trading at a current premium of Rs 100 and an open interest of 10000. The current market level is at 17100.
Scenarios | Strike Price | Premium | % Change | Open Interest | Change in OI | Build-up | Market View |
Current Level | 17000 | 100 | – | 10000 | – | –- | Neutral |
Case 1 | 17000 | 110 | +10% | 10000 | 1000 | Long Build-up | Bearish |
Case 2 | 17000 | 90 | -10% | 11000 | 1000 | Short Build-up | Bullish |
Case 1: In this scenario, you can see that the premium of the options contract has increased along with the open interest. This indicates long buildup (in the Put option) is taking place. This means, there is an expectation for the market to decrease from 17100 to 17000.
Case 2: In this scenario, you can notice that, while the price of the options contract has decreased, there is an increase in the open interest. This indicates a short build taking place. This means, the expectations of the market reaching 17000 have decreased and there is bullish sentiment in the market.
Note: To determine the overall sentiment of the market, we must examine the build-ups of all call and put option strike prices collectively.
Also Read: Basics of Futures and Options Trading in India (For Beginners)!
In Closing
In this article, we covered Short build-up, Long build up meaning and examples under cash, futures, and options markets.
The Long buildup and short buildup is one of the important concepts while trading in the market. It can help individuals understand the overall sentiments and plot the short-term support and resistance levels in the market.
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