What is Long Unwinding in Stock Market: Is it Good or Bad?

The stock market is such a complex place where millions of different types of transactions take place every second. In such a highly complex market, there are chances of mistakes and errors that can be happened to anyone, anytime anywhere while executing transactions.

Similarly, sometimes traders mistakenly put the sell order instead of the buy order or vice versa because of complex or large trades. And when such mistakes occur, corrections are made to fix such mistakes. Unwinding is part of such trade error correction that we will discuss today.

Long Unwinding in Stock Market

Before we discuss other things about Unwinding, do you know what is long unwinding in the share market? Let’s make it clear long unwinding meaning in the stock market. “Unwinding is the process of closing a trading position in the stock market, which means when a selling position is made to correct the transaction error, like sold stocks bought again.

The unwinding is a process where participating in a compensating transaction reverses or closes a trade. And a long unwinding in the cash market means exiting the long positions or squaring them off. And unwinding can be done either trader earned the targeted profit or now there is no movement in the stock that has been bought with the speculation to rise in the near term.

What is Long Unwinding in Stocks?

A long position in stocks means traders have created a long position in any stock and then exited from the same stock. Suppose a trader has mistakenly sold the stock instead of buying, then to fix this error he has to unwind that transaction by buying the sold shares and then buying the shares that were initially supposed to be bought.

In indices, traders create long or short positions in future and options. And to unwind the position in indices they have to make the relevant position in the underlying index. While in stocks, traders can create a position in F&O and the cash market as well.

Long Unwinding in Option Chain

In option chain traders writing the call option means there is an agreement between two parties to buy or sell the underlying assets at a specific price on the specific date of expiry in the future. In the option chain Call and Put are the two options traders use to trade. And there are different options like buying or selling options of different strike prices for trade.

In the option trading when any option is bought to unwind the long position it is called the unwinding of the option chain. And when the traders consider the security is overrated and looking to cover further loss or the call option has achieved the target. The unwinding takes place, and the process of call unwinding can be done in limit orders or market orders.

How Does Unwinding Work?

Unwinding is the process of closing out trades that needs multiple transactions, trades or steps that took time to complete the procedure. To understand better let’s take an example, suppose you have taken a long position in a stock while at the same time also sold the Put of the same stock, then at a certain point in time you have unwind all trades.

Here the entire process involves examining the options available and then selling the original stocks and the same process is also followed by the brokers, who follow this usually to correct the buying or selling errors done by mistake or system issues. In brief, unwinding is the process of closing or reversing the trade by offsetting all such transactions.

How to Identify Long Unwinding?

Identifying the long unwinding in the stock market is possible in the derivatives market (F&O segment). Because in future and options, the contract of the underlying security is bought and sold in lot size containing the number of shares. And when their contracts are signed or ended the number of underlying security is counted as open interest.

Hence, to identify long unwinding you can use the open interest, and here if you have long unwinding in stock and if it’s open interest is falling along with its price it indicates that the current downtrend of the market is weakening.

What Does Long Unwinding Indicate?

Long unwinding is the result of stock mistakenly sold, but when traders take long positions they wait for the profit, and when they earn some profits they exit from such positions. Long and short positions are usually created in the future and options, and when a buyer who was earlier bullish on the market or towards particular stocks or underlying security is now exiting from their positions and it indicates the market is no longer going to move further.

Long Unwinding is Good or Bad

Long unwinding is usually done to correct mistakenly unwanted transactions. It cannot affect the stock market sentiment, as it is not done at a large scale if there is no huge volume of trades under the unwinding transactions.

However, unlike short-selling, if any particular stock broker has done the long position by mistake and later unwound the position, they are existing from the position, it might affect the stock price movement especially if the volume of trade is high. Hence, unwinding is neither good nor bad for the market but individually it is not good for the traders.