F&O trading or Futures and options trading is a popular form of trading in stock markets. It is part of the derivative markets or the secondary markets. Traders have to gain a tremendous knowledge base to successfully carry out F&O trading and know the nuances of the market to take profitable positions. There are also many terms and rules that need to be studied and understood by the traders with regards to the F&O trading, one of them being the F&O Ban.
Given below is the meaning of the F&O ban and its impact on the share prices.
Understanding Futures and Options (F&O) Ban
In the securities market, SEBI has laid many rules for trading in the F&O market. According to these rules, at any point in time, the open interest for any security cannot cross 95% of its Market wide Position Limit (MWPL). If the security crosses this limit, it comes under the F&O ban list.
MWPL is the maximum number of open positions allowed for any security across all the F&O contracts of such underlying security. MWLP is usually calculated to be 20% of the total shares of the company that are held by the non-promoters. Once the stock enters the F&O ban list, the traders are not allowed to take any new trading positions. The only permissible trade in such a case is to offset the open positions. There is a feature on the National Stock Exchange (NSE) which provides the facility on its trading system to display an alert when the open interest of F&O contracts in stock exceeds 60 percent of the Market Wide Position Limit (MWLP). Furthermore, these alerts are displayed in intervals of 10 minutes for the benefit of the traders.
When does the stock enter the F&O ban?
As mentioned above, every stock has a prescribed limit in the form of Market Wide Position Limit. Any stock crossing this limit in trade is banned by the stock exchange. This ban is placed only in the case of stocks so traders trading in indices do not have to worry about this ban. The exchange restricts the trading of any stock in the F&O market when that particular stock is traded beyond the 95% mark.
Once the stock hits the 95% mark, traders are not allowed to take any new positions that are not to exit their existing position. The stock will stay in the F&O ban list till the time the excess positions are not squared off and the total open positions in the F&O market for such stock do not reach 80% of the MWLP. There is no time limit set for the open positions to come back to this level.
There have been many occasions when a stock has been put in the F&O ban list by the exchange when the open positions go beyond the 95% mark. This ban is put in place to restrict excessive speculation as it can affect the market stability and loss of investor confidence. The exchange may also put a stock on the ban list to keep its volatility in check.
Market dynamics during F&O bans
During F&O bans, the Indian stock market is typically more subdued as there is less liquidity in the market. This can lead to lower volumes and narrower trading ranges. However, there are some instances where the market can move sharply during F&O bans, particularly if there is significant news or events that are driving the market. Overall, it is important to be aware of the potential impact of F&O bans on the market and to adjust your trading accordingly.
Volatility and investor sentiment during F&O bans
Volatility and investor sentiment can be affected during F&O bans in Indian markets. F&O bans are typically imposed on the last Friday of every month, and during this time, trading in futures and options contracts is not allowed. This can lead to lower liquidity in the market and narrower trading ranges. As a result, volatility can increase during F&O bans, as there are fewer buyers and sellers in the market. Investor sentiment can also be affected during F&O bans, as some investors may be hesitant to trade in a market with lower liquidity. Overall, it is important to be aware of the potential impact of F&O bans on the market and to adjust your trading accordingly.
Here are some strategies for navigating share price movements during F&O bans in Indian stock markets:
- Use stop-losses. Stop-losses are a way to automatically sell a stock if it falls below a certain price. This can help you limit your losses if the market moves against you.
- Trade with a smaller position size. This will help you reduce your risk if the market moves against you.
- Trade in liquid stocks. Liquid stocks are stocks that are easy to buy and sell. This will help you reduce your risk if you need to exit a trade quickly.
- Be patient. The market may be more volatile during F&O bans, so it is important to be patient and not trade too aggressively.
Impact on trading volumes and liquidity
A stock can be on the F&O ban list for a temporary period or permanently. When the stock crosses the Market wide Position Limit (MWPL) beyond the stipulated 95% it is put on a temporary ban list till the time it reaches the level of 80% of the MWLP. In such a case, there may or may not be a significant impact on the share prices.
On the other hand, stock can be put on the permanent ban list if such a company has violated the rules and regulations laid down by the exchange or SEBI. Some examples of these regulations can be lack of liquidity, inadequate market capitalization, fraud by management, etc. Such a permanent ban can also impact the share prices of the banned stock (for example the ban on Satyam Computer Services where the share pieces decreased drastically).
Futures and options are a complex form of trading in the derivatives market that requires the traders to adhere to the various regulations set by the exchange and the regulator. These regulations are set to safeguard the interest of the investors and to protect them and the market as a whole from the perils of excessive speculations. The F&O ban list is one such regulation that is put in place to safeguard the traders.
When the traders take a position on stocks that are put in the F&O ban list, they are liable to pay a penalty at the rate of 1% of the value of the increase in the position. The minimum limit for such a penalty is Rs. 5,000 and the maximum limit is Rs. 1,00,000.
A stock is removed from the F&O ban list when the open interest of such security falls to 80%.
No. F&O ban list can include only stocks. This regulation is not applicable for F&O trading in indices.
Yes. NSE provides alerts of the stocks that breach 60% of the MWLP and such alert is provided at the interval of 10 mins.