It is the F&O ban regulation is intended to stop excessive improve and speculation in intraday trading. If the market's speculation with regard to a specific stock exceeds the limit set by a stock exchange that exchange will place the stock under F&O ban. To avoid excessive speculation, once stocks enter the period of ban, there are no new positions are open for the stock. The only way to trade is to close current positions or to square off the positions that are already in place.
What exactly is F&O ban? How do it work?
The trading of Futures and Options takes place within the derivatives market. When certain conditions arise and the exchanges are concerned that the security of trading has been compromised and could put traders at risk who trade in the market, they will ban F&O trading on a specific stock. The ban applies only to one specific stock, and not for the whole market for derivatives. When a stock is listed placed on an F&O Ban List, that means traders won't be allowed to open open positions with this stock on the derivatives market until this ban gets lifted.
The purpose of keeping a particular stock under F&O restriction is that it will avoid speculation and excessive trading in the stock. The stock exchange allows for this particular stock traders are able to quit their positions or re-square their positions. If traders endeavor to take a an extra position in the stock, they will be penalized by one percent of the amount that is an improve to the position.
What is the reason why F&O contracts fall into ban periods?
If the stock is traded on the derivatives market, which includes futures or options it will be subject to the trade limit called the MWPL. The F&O stocks are subject to a ban when the open interest of a stock is greater than 95 percent of the Market Wide Positions Limits(MWPL). This is a limitation on the stock exchange which defines the maximum amount of contracts that could be open at any one moment. This is referred to as open interest and encompasses any outstanding purchase and sale contracts in the futures and options contract. MWPL can be positive or negative. MWPL could be defined as 20 percent of the total shares owned by non-promoters.
For example, if company XYZ owns 100 shares from which non-promoter companies own 60 or 60% shares The MWPL position of XYZ is 120 shares.
According to the rules for exchanges, open interests of the company's stock cannot be greater than 95% 120 shares. Thus, the current open position of the stock can't be more than 114 shares. In the event that F&O positions of XYZ share exceed 114 and the stock is added to the F&O ban list. Stocks will not be taken off the F&O ban list once the open positions are reduced to around 80% MWPL trading volume, and traders will be permitted to take on any new position in the company.
Impact of F&O restriction on shares prices
F&O contracts are subject to an F&O ban for a variety of reasons, including over-speculation and volatility in the market. A F&O ban can have a major impact on the price of shares, as traders try to exit their positions, and demand for the stock declines. Over-speculation can damage confidence in the market, and may result in a negative impact in terms of investor sentiment throughout the market. Because of the restrictions placed on trading, any stock that is listed on the banned list will see a steady decline in its value.
Due to the restrictions on trade because of the restrictions on trade, the value of any stock that is on the banned list is continuously declining. It's also affected by the fact that those who taken positions in this stock i.e. bought options and futures on the stock are compelled to cut their positions, and consequently reduce their profits from trading. The stock could also be included in an F&O ban to reduce the volatility of the stock. For instance, Delta Corp was recently placed on the F&O ban list after it climbed over eight percent over three consecutive trading sessions.
It is the NSE (National Stock Exchange) provides a key feature to this end, in their trading platform an alert is shown whenever the open interest for options and futures contracts in the stock exceeds 60 percent of the market-wide position limit. Alerts are displayed at increments of 10 mins. The excessive speculation about a company in particular, especially when it affects their free-float may cause a serious risk for investors of small size. The free float of an individual stock is a measurement of the availability of stocks on the stock market that are open to public investment. This is why it is the responsibility by traders to be vigilant and cautious when trading in options and futures.
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