Short covering is the process of a trader buying back a security that they have previously sold short in order to close out their short position. Options data can be a useful tool for detecting short covering because options traders often use options contracts to cover their short positions.
There are a few key indicators that you can look for in options data to detect short covering:
- Increased volume: If you see an increase in the volume of options contracts being traded, it could be a sign that traders are covering their short positions.
- Increased open interest: Open interest is the total number of options contracts that are currently outstanding and have not yet been settled or closed. An increase in open interest can be a sign that traders are opening new positions, including covering short positions.
- Changes in implied volatility: Implied volatility is a measure of the expected volatility of a security’s price. If you see an increase in the implied volatility of options contracts, it could be a sign that traders are expecting more price movement in the underlying security and are covering their short positions.
- Changes in the options market makers’ delta: The delta of an options contract is a measure of how much the price of the option is expected to change in response to a change in the price of the underlying security. If you see an increase in the delta of options contracts, it could be a sign that market makers are becoming more bullish on the underlying security and are covering their short positions.
It is important to note that these indicators are not always clear-cut, and it may be necessary to look at multiple indicators and consider other factors in order to accurately detect short covering in the options market.