Impact of F&O ban on share price: If you have ventured into the world of the derivatives market, you must know that not all the shares trade in this segment. The stocks need to fulfill certain criteria in order to get included in this segment.
But, even after the inclusion of the stocks in the F&O segment, there are possibilities of stock going under the F&O ban. In this article, we will cover the meaning of the F&O ban and also discuss the impact of f&o ban on share price.
What Is F&O Ban?
Trading in Futures and Options occurs in the derivatives market and when the stock exchange believes that F&O trading in a particular stock is risking the integrity of trades and putting the traders at risk, they ban the particular stock from trading in the F&O segment.
The ban only applies to the specified stock(s) and not to the entire derivatives market. One should note that the exchanges may even trigger a market suspension in stocks, bonds, or forex markets.
When a particular stock is said to be on the F&O ban list, it means that until the ban is lifted, the traders will not be able to open any fresh positions in the derivatives market.
The purpose of adding a stock to the F&O ban list is to combat its excessive surge and speculative trading in that stock. The only trading permitted by the stock exchange in that specific stock in the derivative market is for traders to exit their positions.
If any individual tries to take fresh positions on a stock that is under the F&O ban list, a penalty which is 1% of the value of the increase in position will be levied on the individual.
When Does The Stock Enter The F&O Ban?
Several rules have been placed by SEBI for trading in the F&O market. As per these rules, the open interest of security should not cross 95% of its Market Wide Position Limit (MWPL). The security will come under the F&O ban list when the security crosses 95% of its MWPL.
Market Wide Position Limit is the maximum number of open positions that are allowed on futures and options contracts of the particular underlying stock.
Can I sell F&O ban stocks?
As mentioned in the above explanation, individuals will not be able to open a fresh buy/sell position in F&O when a stock comes under the ban list, but they will be able to square off their existing position in the market. Though buying/selling is banned in the F&O segment during the ban period, individuals will be able to trade the stock in the cash segment
How long does a stock stay in F&O ban?
The stock will remain in the F&O ban list until the open positions come down to 80% of the MWPL. Once the open positions come down to the specified level, individuals will then be allowed to take fresh positions in the stock. But if the stock has violated the rules and regulations laid down by the exchange or SEBI, it can be put on the permanent ban list
How Is Market Wide Position Limit Calculated?
MWPL should be lesser than 30 times the daily an average number of shares traded in the relevant underlying security during the previous calendar month or 20% of the number of shares held by non-promoters in the relevant underlying security, or free float holding.
For instance, if the equity base of a company consists of 10000 shares, of which 40%(4000 shares) is held by the non-promoters, the MWPL will be 800 shares which are 20% of 4000 shares.
Impact of F&O Ban On Share Price
Banning certain stocks from the F&O trading list is one of the many methods the stock exchange employs to control the speculative behaviour of some traders in the derivatives market.
If such behaviour is not stopped, it may cause market volatility and decrease the confidence of the investors throughout the market. To reduce stock volatility, a stock may also be placed in the F&O ban.
However, adding some securities to the F&O list can have a big impact on the share price of those stocks. After all, traders who purchased futures and options on a particular stock will need to square off their positions after being forced to take a loss.
This can cause a jolt in the spot market even if the trades mostly occur in the derivatives market. This can cause the price of the security in ban to decline.
In this article, we discussed the meaning of the F&O ban, how a stock enters the F&O ban, and the impact of F&O ban on share price.
While a stock being put in the F&O ban list may not directly affect the price of the stock, it is important to know how the move happened.
Inclusion of the stock in the F&O ban list doesn’t change the fundamentals of the stock, but it only controls the actions of the speculators which helps to control the volatility of the stock price.
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