The stock market today witnessed a volatile session on Tuesday as the Nifty 50 index fluctuated between gains and losses before closing at 22,057.15, up 0.67%. The Sensex also ended higher by 0.51% at 74,222.58. Among the sectoral indices, Nifty Media, Nifty Auto, and Nifty Pharma outperformed, while Nifty PSU Bank, Nifty Metal, and Nifty Realty underperformed.
Stock market today
One of the factors that influenced the market mood was the F&O ban list, which showed 11 stocks under the market-wide position limit (MWPL) as of February 16, 2024. These stocks are Zee Entertainment, Ashok Leyland, Bandhan Bank, Biocon, Steel Authority of India (SAIL), Indus Towers, Piramal Enterprises, National Aluminium, UPL, Hindustan Copper, and Escorts. This means that the derivative contracts in these stocks have crossed 95% of the MWPL and are currently in the ban period.
What are F&O ban lists and MWPL?
A F&O ban list is a list of stocks whose combined open interest in all futures and options contracts for a given period exceeds 95% of the total position limit for that stock. Open interest refers to the cumulative count of unfulfilled derivative contracts yet to undergo settlement. Derivative contracts are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. Investors can engage in the fluctuations of the underlying asset’s price without direct ownership through these instruments.
MWPL sets a boundary on the number of unsettled option contracts permitted for a specific derivative stock simultaneously. It ensures market fairness, prevents too much speculation, and manages risks linked to concentrated positions in the market. The MWPL is calculated as 20% of the number of shares held by the non-promoters in the relevant underlying security.
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The primary objective of the F&O ban list is to uphold market stability, curb excessive speculation, and uphold equitable trading practices. When a stock is on the ban list, it means that investors can only trade in the derivative contracts of that stock to decrease their positions through offsetting positions. Any increase in open positions will attract appropriate penal and disciplinary action by the National Stock Exchange (NSE).
How does the F&O ban list affect the stock price and trading volume?
The F&O ban list can have both positive and negative effects on the stock price and trading volume, depending on market sentiment and the demand and supply of the underlying asset. Some of the possible effects are:
The F&O ban list can create a scarcity of derivative contracts in the market, which can increase demand and the premium for the existing contracts. This can lead to a rise in the stock price, as investors may buy the underlying asset to hedge their positions or speculate on the price movement.
The F&O ban list can also reduce the liquidity and flexibility of the derivative contracts, as investors cannot enter into new positions or roll over their existing positions. This can lead to a fall in the stock price, as investors may sell the underlying asset to exit their positions or to avoid the risk of holding illiquid contracts.
The F&O ban list can also create a divergence between the spot price and the futures price of the stock, as the futures price may not reflect the true value of the underlying asset. This can create arbitrage opportunities for investors, who can exploit the price difference by buying the cheaper asset and selling the expensive one.
The F&O ban list can also affect the trading volume of the stock, as investors may shift their focus to other stocks that are not on the ban list or to other segments of the market, such as cash, commodities, or currencies. This can reduce interest and participation in the stock, which can affect its price discovery and volatility.
Which stocks are likely to enter or exit the F&O ban list?
The F&O ban list is updated daily by the NSE based on the open interest and the MWPL of the stocks. The stocks that have a high open interest rate and are close to the 95% threshold are likely to enter the ban list, while the stocks that have a low open interest rate and are below the 95% threshold are likely to exit the ban list. Some of the factors that can influence the open interest in stocks are:
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- The market trend and the momentum of the stock can attract more buyers or sellers to the derivative contracts.
- The earnings and events of the stock can create more volatility and uncertainty in the price movement.
- The interest rate and the dividend of the stock can affect the cost of holding the derivative contracts.
- liquidity and the availability of the derivative contracts, which can affect the ease of entering and exiting the positions.
According to the NSE data, as of February 16, 2024, some of the stocks that have a high open interest and are close to the 95% threshold are Canara Bank, Tata Chemicals, Piramal Enterprises, RBL Bank, and Aditya Birla Fashion and Retail. These stocks are potential candidates for entering the ban list in the near future. On the other hand, some of the stocks that have a low open interest and are below the 95% threshold are UPL, National Aluminium, Indus Towers, Piramal Enterprises, and SAIL. These stocks are potential candidates for exiting the ban list in the near future.
How do I trade the stocks on the F&O ban list?
The F&O ban list can create both challenges and opportunities for the investors who trade the stocks on the list. Some of the strategies that can be used to trade the stocks on the ban list are:
Hedging: Hedging is a strategy that involves taking an opposite position in the derivative contract to reduce the risk of the underlying asset. For example, if an investor is long on the stock, they can hedge their position by buying a put option or selling a call option on the same stock. This way, they can protect their downside risk in case the stock price falls. However, hedging also reduces the upside potential in case the stock price rises. Hedging can be done before or after the stock enters the ban list, but it is advisable to do it before the ban list to avoid the scarcity and the premium of the contracts.
Speculating: Speculating is a strategy that involves taking a directional position in the derivative contract to profit from the price movement of the underlying asset. For example, if an investor expects the stock price to rise, they can speculate by buying a call option or selling a put option on the same stock. This way, they can leverage their position and earn a higher return than buying the stock outright.
However, speculating also increases the risk of the position, as the investor can lose the entire premium paid or received if the stock price moves against their expectations. Speculating can be done before or after the stock enters the ban list, but it is advisable to do it after the ban list to take advantage of the volatility and the divergence of the prices.
Arbitraging: Arbitraging is a strategy that involves taking a simultaneous position in the spot market and the futures market to exploit the price difference between them. For example, if the spot price of the stock is lower than the futures price, the investor can arbitrage by buying the stock in the spot market and selling the same stock in the futures market. This way, they can lock in a risk-free profit, irrespective of the price movement of the stock.
However, arbitraging also requires a high level of capital and a low transaction cost, as the profit margin is usually very thin. Arbitrage can be done before or after the stock enters the ban list, but it is advisable to do it before the ban list to avoid the illiquidity and the premium of the contracts.
How do I check the F&O ban list and the MWPL of the stocks?
The F&O ban list and the MWPL of the stocks are available on the NSE website. Accessing them involves following these steps:
Go to the NSE website at https://www.nseindia.com/.
Click on the Products tab and select Equities.
Click on the Derivatives tab and select Futures & Options.
Click on the Market Data tab and select Daily Reports.
Under the Futures & Options section, click on the Securities in Ban Period link to view the F&O ban list.
Under the Futures & Options section, click on the Market Wide Position Limit link to view the MWPL of the stocks.
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What is the difference between futures and options?
Futures and options are two types of financial derivatives that let you buy or sell an underlying asset at a specific price on a specific date. Nevertheless, there are notable distinctions between them:
A futures contract obligates you to buy or sell the underlying asset on a specific future date, while an option gives you the right but not the obligation to do so.
A futures contract has a fixed price and quantity, while an option has a strike price and a premium.
A futures contract involves higher risk and unlimited profit or loss, while an option involves limited risk and unlimited profit or limited loss.
A futures contract requires no upfront payment, while an option requires a premium payment.
Conclusion
The F&O ban list is an important indicator of market activity and the sentiment of stocks. It can have a significant impact on the stock price and the trading volume, depending on the demand and supply of the underlying asset and the derivative contracts.
The investors who trade the stocks on the ban list need to be aware of the implications and strategies of the ban list and use them to their advantage or disadvantage. The F&O ban list can also provide clues about the potential entry and exit points of the stocks, based on the open interest and the MWPL of the stocks. The F&O ban list can be a useful tool for investors who want to hedge, speculate, or arbitrage the stocks on the list.
FAQs
Q: What is the F&O ban list?
Ans. The F&O ban list is a list of stocks whose combined open interest in all futures and options contracts for a given period exceeds 95% of the total position limit for that stock. This means that investors can only trade in the derivative contracts of that stock to decrease their positions through offsetting positions. Any increase in open positions will attract appropriate penal and disciplinary action by the National Stock Exchange (NSE).
Q: What is the purpose of the F&O ban list?
Ans. The primary purpose of the F&O ban list is to ensure market stability, prevent excessive speculation, and maintain fair trading practices. When a stock is on the ban list, it means that the derivative contracts in that stock have crossed 95% of the market-wide position limit (MWPL) and are currently in the ban period.
Q: What is the market-wide position limit (MWPL)?
Ans. The MWPL is a limit that says how many unresolved option contracts there can be for a given derivative stock at the same time. It ensures market fairness, prevents too much speculation, and manages risks linked to concentrated positions in the market. The MWPL is calculated as 20% of the number of shares held by the non-promoters in the relevant underlying security.
Q: How does the F&O ban list affect the stock price and trading volume?
Ans. The F&O ban list can have both positive and negative effects on the stock price and trading volume, depending on market sentiment and the demand and supply of the underlying asset and the derivative contracts. Some of the possible effects are:
- The F&O ban list can create a scarcity of derivative contracts in the market, which can increase demand and the premium for the existing contracts. This can lead to a rise in the stock price, as investors may buy the underlying asset to hedge their positions or speculate on the price movement.
- The F&O ban list can also reduce the liquidity and flexibility of the derivative contracts, as investors cannot enter into new positions or roll over their existing positions. This can lead to a fall in the stock price, as investors may sell the underlying asset to exit their positions or to avoid the risk of holding illiquid contracts.
- The F&O ban list can also create a divergence between the spot price and the futures price of the stock, as the futures price may not reflect the true value of the underlying asset. This can create arbitrage opportunities for investors, who can exploit the price difference by buying the cheaper asset and selling the expensive one.
- The F&O ban list can also affect the trading volume of the stock, as investors may shift their focus to other stocks that are not on the ban list or to other segments of the market, such as cash, commodities, or currencies. This can reduce interest and participation in the stock, which can affect its price discovery and volatility.
Q: Which stocks are likely to enter or exit the F&O ban list?
Ans. The F&O ban list is updated daily by the NSE based on the open interest and the MWPL of the stocks. The stocks that have a high open interest rate and are close to the 95% threshold are likely to enter the ban list, while the stocks that have a low open interest rate and are below the 95% threshold are likely to exit the ban list. Some of the factors that can influence the open interest in stocks are:
- The market trend and the momentum of the stock can attract more buyers or sellers to the derivative contracts.
- The earnings and events of the stock can create more volatility and uncertainty in the price movement.
- The interest rate and the dividend of the stock can affect the cost of holding the derivative contracts.
- liquidity and the availability of the derivative contracts, which can affect the ease of entering and exiting the positions.
According to the NSE data, as of February 16, 2024, some of the stocks that have a high open interest and are close to the 95% threshold are Canara Bank, Tata Chemicals, Piramal Enterprises, RBL Bank, and Aditya Birla Fashion and Retail. These stocks are potential candidates for entering the ban list in the near future. On the other hand, some of the stocks that have a low open interest and are below the 95% threshold are UPL, National Aluminium, Indus Towers, Piramal Enterprises, and SAIL. These stocks are potential candidates for exiting the ban list in the near future.
