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If you are a trader in futures and options or someone who closely follows the stock market, you must have seen instances of the stock exchanges banning stocks.
Ban on stocks in F&O happens regularly, sometimes every day.
Here is everything you need to know about what it is and why stocks go under a ban.
What is an F&O ban?
Traders use futures and options contracts to speculate price movements and hedge risks in the stock market.
The increase in speculation impacts share prices vastly, leading to constant fluctuations. The stock exchange, aiming to avoid such situations, imposes a ban on those volatile stocks to bring prices under control.
Concepts related to F&O ban
- Open interest
Open interest refers to the number of derivative contracts in the market that have not reached the settlement date yet, meaning the contract is still active.
- Market Wide Position Limit (MWPL)
The MWPL is a limit set by the stock exchange for securities. It determines the number of derivative contracts that can be open or outstanding for a stock at a particular time.
Stock exchanges determine the MWPL of a stock based on its free float capitalisation. Both NSE and BSE have set the MWPL at 20% of a stock’s free float capitalisation.
When and why does the stock exchange impose an F&O ban?
If the open interest of a stock goes beyond 95% of its MWPL, the stock exchange imposes an F&O ban on that stock. The ban is lifted once the open interest comes under 80% of MWPL. In some cases, it takes only one day for the open interest to go below the limit. Sometimes, it takes multiple days.
- What happens when a stock is in an F&O ban?
When the number of open contracts for a stock is high, it indicates the high level of speculation in the market that can affect stock prices. It also shows illegal traders the potential opportunities to manipulate the market.
Hence, the stock exchange tries to control these activities through a ban.
How are share prices impacted?
The influence of a ban on the price of stocks depends on other factors like the past performance of the stock and the creditworthiness of the company.
An F&O ban on stock with a good reputation does not impact the stock prices too much. The price is usually stable or has a slight increase or decrease.
A ban on stocks that are gloomy has a strong effect on prices. The ban may lead to a rapid decrease in prices.
What does the ban mean to traders?
- The ban applies only to certain stocks and not the entire market, meaning traders can continue to trade in other stocks as usual.
- The ban indicates that traders cannot enter into any new contracts.
- The restriction is only on entry; traders are free to exit their positions or square off, even during the ban.
- The F&O ban applies to stocks and not to indices.
- The exchange penalises traders who violate the F&O ban. A fine of 1% (with a minimum limit of ₹ 5,000 and an upper limit of ₹ 1,00,000) of the new or additional position is chargeable by the exchange.
- Traders can continue to trade the stocks under the ban in the cash market.
Sourcing the list of stocks under the F&O ban
The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) publish details of stocks in the F&O ban period daily.
Examples of stock symbols that were part of the recent F&O ban:
|26 Sep 2023
|27 Sep 2023
|28 Sep 2023
The knowledge of the F&O ban is a significant concept for traders in the derivatives market. It is essential to keep track of the stocks to ascertain in advance the list of stocks that can potentially go under the F&O ban.
As of December 20, 2023, ten stocks are in the F&O ban: Balrampur Chini, Delta Corp, Indus Towers, IRCTC, Manappuram Finance, National Aluminium Company (NALCO), Piramal Enterprises (PEL), RBL Bank, Zee Entertainment Enterprises (ZEEL) and Steel Authority of India (SAIL).
A F&O ban is a measure to limit speculation and volatility in the stock market. It can be good or bad, depending on your trading style and objectives. A F&O ban can protect the market from manipulation but also restrict your trading opportunities.
F&O ban lasts until the open interest on the stock falls below 80% of the market-wide position limit (MWPL). This can happen on the same day or later, depending on the trading activity. Normal trading resumes when the ban is lifted.
Yes, you can sell F&O ban stocks, but you cannot buy or create new positions in them. Traders are penalised 1% of the increased position value if they attempt to open new positions on a stock that has been placed on the F&O ban list.
Stocks go into F&O bans when their open interest exceeds 95% of the market-wide position limit (MWPL). This is a regulatory action intended to reduce excessive stock market volatility and speculation. F&O bans are lifted when the open interest falls below 80% of the MWPL.