In recenttimes, we have got to know a thing like the F&O ban but the truth is thatnot many are aware of it. In the field of stock trading and investment, this is the trending term and it is necessary to understand it as it may have some impact on the share prices. So, let’s get to know it below.
If you are oneof those who prefer to trade in Futures and Options (F&O), you just need toknow that the stock exchanges tend to put on a ban F&O at specific times. In such a scenario, traders are not allowed to open new positions in an F&O stock. However, they are allowed to bring down their stock position by settling their positions.
What is F&OBan?
The concept ofthe stocks ban in F&O is to avoid additional hypothetical activity. Thestock exchange puts a ban on F&O when the collective open interest of a stock goes beyond 95 percent of the market-wide position limit (MWPL). Here open interest means all unsettled buying and selling positions in the F&O contracts.
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MWPL refers tothe lower of these two numbers:
– 30 times theaverage quantity of shares that are traded regularly during the previous monthin the cash category of the stock exchanges.
– 20% of thenumber of shares possessed by non-promoters, or free-float holding.
If a stock traderhas dishonored the F&O ban and augmented or formed a new position in thestock, that trader would be liable to pay a penalty of 1% of the value of the changed position even in the case of the best stock market app. This is capped at a maximum limit of Rs 5,000, and an optimum amount of Rs 1 lakh.
The F&O banstays till the combined open interest attains the level of 80 percent or lowerof MWPL across different stock exchanges. The usual trading is restarted on the scrip post this.
The stocktraders are known to incur big losses F&O ban as they are caught bysurprise as they will have to settle off their transactions at a rate that may be unacceptable to many. However, if they remain aware of this, they could choose to side-line such a situation. The NSE enables a capability on its trading ecosystem that shows an alert after the open interest of futures, and contracts in security go beyond 60% of the market-wide position boundary stated for the security. These signals are shown in the gap of 10 minutes.
It is to notethat no MWPL for indexes, therefore, traders in the index, and futures optionsdo not have to be afraid of the F&O ban.
So, in the caseof trading, you need to be wary of stocks in the F&O ban to avert facingdamages. You need to be principally cautious when the free trading of the stocks you are interested in is low. In this case, dishonest traders could feat to utilize the scenario to influence liquidity. Small traders are specifically susceptible to this.
It is worthaccepting that when the F&O ban is put on a stock, and no fresh positionsare considered, the stock price will cease to remain miserable till the lifting of the ban. It also means the major responsibility lies on the side of stock exchanges, and the regulatory authority like SEBI to thwart speculative activity from getting uncontrollable, as it tends to disturb the stability of the market, and loss of confidence. However, during the stock trading, it is recommended to keep an eye out on the MWPL range to inhibit the F&O ban from causing losses to you.
However, theban on F&O stocks won’t apply to intra-day trades as the open interestremains infrangible, as per the best demat account in India.
Stock exchanges make theuse F&O ban as a prevention action, to avert extreme conjecture on F&Oinstruments, precisely when the cumulative open interest of stocks reaches 95% of the market-wide position limit (MWPL). After this, it is put on the list of the ban. At this stage, a trader can’t launch a fresh position but can settle off its running supply.
The Conclusion
When it comesto trading in Futures & Options, one needs to keep a close check on everysingle element during the trade as it tends to have a lasting impact on the overall profit or loss. Though there may not be a direct impact on the price of a stock in the case of the F&O ban, it is necessary to know the reason behind the ban. And, the best way to unravel the same is to perform a technical and fundamental analysis of the stock.
