Why are Stocks Banned in F&O?

If you trade in the futures and options space in India, You would have regularly come across the term stating that a particular stock is in the F&O ban period. Have you ever wondered as to why the F&O ban and what is this ban all about? What is the reason for stocks being banned in F&O trading and how does it impact your trading strategy?

To understand why stocks, the ban in F&O are done, we need to understand the all-important concept of market-wide position limit or MWPL. The entire concept of imposing an F&O ban, sustaining the F&O ban, and removing the F&O ban is based on this very concept of MWPL. To begin, let us begin by understanding why stocks ban in F&O?

What is the F&O ban list?

Let us begin by understanding why do stocks under futures and options trading enter ban period, what are the implications and why F&O ban in the first place? Let us begin with the concept of the market-wide position limit or MWPL first and foremost.

All stocks traded in the F&O segment (and this list is defined and refined from time to time by SEBI in consultation with the stock exchanges), have an MWPL (Market-wide positions limits) limit that is set by the exchange. The MWPL limit will define how many maximum numbers of contracts can be open at any point in time. Here when we talk of open positions, we are talking about the open interest. Now, open interest is the position that has been created in the market but has not been closed out.

The MWPL limits are always measured in terms of the open interest of the particular stock. Normally, the open interest of a stock increases when fresh positions are created and open interest falls when the existing positions are closed out. For example, If the open interest of any stock crosses 95% of the MWPL (All futures and options contracts of that stock), all F&O contracts of that stock enter a ban period. That means, once a particular stock enters into the ban period, then no fresh positions are permitted either in futures or in options that would enhance the open interest of the particular stock. It does not matter if the open interest pertains to futures or to call options or to put options.

What does the F&O ban list mean for traders? When the stock in which there are traded F&O contracts gets into the ban period, no fresh positions are allowed for any of the futures and options contracts in that stock. This ban list is disclosed by the stock exchange every day as part of its notifications before the start of trading. Once the open interest in stock (including all futures and options) exceeds 95% of the MWPL, fresh positions will be banned.

Remember, that once fresh positions are banned on a particular stock, then you will only be allowed to exit the existing positions during this period. There is no bar on closing open positions, the bar is only on initiating fresh positions that will enhance the open interest in the market. The ban will be reversed only if the open interest falls below 80% of the MWPL.

Most brokers normally download the stocks in the F&O ban list daily and circulate them to their clients. If the broker allows positions in such contracts, the broker gets penalized for a breach of regulations. The idea is to curb speculation in stocks with low float. However, the ban list does not in any way prevent you from trading the stock in the cash market.

How much is the ban period on NSE?

The ban is imposed on the stock for fresh F&O positions once the 95% of MWPL limit is touched. Broking systems issue warnings to clients at 80%, 85%, and 90% so that they can prepare their strategy accordingly. Once the 95% is breached, then fresh positions will only be allowed after the open interest comes back to below 80% of MWPL. Till then the ban will remain in force for fresh F&O OI buildings.