Introduction

A frequent occurrence in trading is long unwinding, where traders liquidate their current holdings to exit a long position. If you are an investor or a trader, understanding unwinding might help you recognise some of the price movements in the market and make better decisions. But what, precisely, is long unwinding and is it always bad?

Let's take a moment to define this term, the process behind it, and the implications for Indian investors, particularly for those of you trading in futures and options (F&O).

What is Long Unwinding?

Long unwinding is the liquidation of long positions in the stock market by traders or investors. A long position, for example, means that you have purchased a stock, futures contract, or option, anticipating that the price will rise. Unwinding would be the process of an investor offloading their long position, regardless of whether they were planning to take profits, limit losses, or avoid a turbulent market.

Think of it like selling your tickets to a cricket match you thought would be a blockbuster but now seems headed for a washout. In India’s F&O market, long unwinding is most visible in contracts like Nifty futures or stock options, where traders actively buy and sell based on market swings. When many traders unwind at once, it can ripple through the market, often pushing prices down.

Open Demat Account and Start Trading!

How Does Long Unwinding Work?

Imagine you bought 1,000 shares of a particular Bank at ₹1,500, expecting a rally. Or maybe you hold a long position in Bank Nifty futures, hoping for a bullish surge. You might sell those holdings to exit if the market turns sour due to a global sell-off or a hawkish RBI policy. That’s long unwinding stocks in action.

In the derivatives space, long unwinding is marked by two telltale signs:

• Falling Prices: As traders sell their long positions, supply increases, nudging the stock or index lower

• Dropping Open Interest: Open interest, the number of active F&O contracts, declines as traders close positions, unlike new trades, which would increase it.

For example, if traders holding long positions in Reliance Industries’ call options start selling en masse, you’d see Reliance’s option price dip and its open interest shrink. This signals long unwinding, often hinting at fading optimism.

Is Long Unwinding Always Bearish?

Many consider long unwinding a red flag, and rightfully so! When a trader is trying to get out of a long trade, he/she will put a lot of sell orders into the market, which will cause the stock to fall rapidly. For example, in late 2023, a lot of traders unwound their long positions on Adani Enterprises futures when Adani was embroiled in controversy, which led to a disastrous decline in the stock price. This sell-off indicated negative trader panic (admittedly, due to factors outside the regular market framework).

Long unwinding can propel declines further in India's F&O ecosystem. When declining open interest occurs in conjunction with a declining Nifty index in futures pricing, this usually suggests that traders are exiting long or bullish positions, which can further drag down the broader market. Retail investors that observe the Sensex declines during exiting long positions can feel the heat. Not all is doom and gloom with long unwinding! Long unwinding can signify profiting off a long position, not panic! It is important to think through the context as well. Traders unwound their long position on SBI futures after the earnings rally to secure a profit but were not expecting a decline to follow.

Long Unwinding in Indian Markets

For Indian investors, recognising long unwinding can sharpen your market radar. Keep an eye on:

• Price Declines: A stock or index falling steadily, like ICICI Bank dropping from ₹950 to ₹900.

• Open Interest Trends: A drop in active contracts, visible on platforms like NSE’s F&O data.

• Trading Volumes: High volumes during a price dip suggest active selling, a hallmark of unwinding.

Long unwinding meaning in the stock market

For retail investors in India, long unwinding is worth taking a pause for a readjustment in your own trading strategies. And, if you are holding stocks like TCS and they are unwinding in futures, it may represent a short-term downside and cause the investor to resist "locking in" and just wait and see whether you should buy back in more stock. If you are involved with options trading, long unwinding directional pricing may facilitate your decision about the timing of your entry and exit.

Just be aware that F&O trading is a risk. SEBI's 2024 reports depict that retail traders mostly lose money in derivatives, meaning that you should not chase unwinding signals without verifying the signal in the direction of the unwind with other indicators - such as news events, technical charts, or even corporate earnings.

Conclusion

Long unwinding acts as a pulse check on market sentiment. For example, whether it was traders exiting the Nifty futures ahead of a budget speech or stock options traders selling Hindalco options amid sliding global metal prices, it conveyed motion. Unwinding can mean any number of things: profit-taking, expiry mechanics, or just true bearish pressure; context matters. Use MyNSE data or trading apps, be aware of your zones through ET Markets, and ultimately, consider learning more about what your SEBI-registered advisor must tell you. India’s markets keep one energised, and blending caution and curiosity is how one learns to convert "signals," like long unwinding, into opportunities and learning moments.

Related Blogs - Bearish Options Trading Strategies | Bearish Belt Hold Candlestick Pattern | Options in Bearish Market