Ten stocks will debut in the Futures and Options (F&O) segment from August 27, according to the National Stock Exchange (NSE). These stocks include Dixon Technologies, Can Fin Homes, IndiaMART, Hindustan Aeronautics, Polycab India, Ipca Lab, Oracle Financial, Syngene International, Indian Energy Exchange and MCX, and would be made available for trading in the F&O segment.
According to the NSE, the details such as market lot would be made available a day prior to the debut of the new stocks. These stocks have been included in the F&O segment on the basis of the criteria that has been set by the market regulator, SEBI.
The NSE had added four securities in F&O contracts from the July series; it also added two securities with effect from July 30, according to a circular in July.
Criteria for inclusion in F&O
Some of the criteria for inclusion in the futures and options segment is that the stock needs to be picked from the top 500 stocks rated on the basis of average market cap on a daily basis and average daily traded value over the last six months on the basis of rolling calculation. The other eligibility norm, which is subject to SEBI approval, states that the median quarter sigma order size of the stock in the last six months should not be under Rs 25 lakh. The media quarter sigma order size, in lay terms, would mean the order size that is needed to create an impact on the price of a stock.
Further, the market-wide position limit in the introduced stock needs to be not less than Rs 500 crore (rolling basis). This in lay terms states whether a stock is widely traded or held by few people.
SEBI also notes that if a security does not meet the eligibility norms for three months in a row, then fresh monthly contracts would not be issued on that specific security. However, SEBI notes that the existing contracts that have not yet expired would be allowed for trading till the expiry and also fresh strikes could be introduced in the current contract months.
The securities eligible for introduction in the F&O segment vary on a monthly basis. The average daily values of market cap, traded value, quarter sigma order size and deliverable can vary, and these values are computed each month on a rolling basis for the last six months. Also, a certain stock that has been excluded from trading could be up for reintroduction, and in such cases, the stock would need to meet enhanced requirements for eligibility for six months in a row, according to SEBI in its circulars from 2018.
What are futures and options contracts?
A futures contract is one where there’s an agreement between two parties to buy or sell securities on a future date for a price that is agreed upon while signing such a contract. The agreement occurs through the NSE or BSE. Options contract, on the other hand, gives the right to buy or sell an underlying asset at a specific date or price, but there is no obligation involved.
F&O trading cycles
According to the NSE, futures contracts have a trading cycle of three months maximum, including the near, next and far months. Fresh contracts get introduced on the trading day after the expiry of the near month contracts, and since new contract introduction is for three months, there are three contracts made available for trading at any given point. Options contracts too have a three-month cycle of trading. F&O contracts end on the last Thursday of the third month , and if the last Thursday happens to be a holiday, then the contracts expire on the prior trading date.
NSE lot size for F&O contracts
In a separate development, the NSE cut down the F&O lot size of Nifty50 contracts to 50 from the earlier 75 with effect from April 2021. The NSE also reduced the lot size for F&O by half for 40 stocks. These were brought into effect from the July series of F&O contracts. This lowering of lot size, according to reports, will lower margin requirements by a third for futures trading and comes as a relief for traders.
The NSE, has in a circular, stated that it would introduce 10 stocks to the F&O segment from August 27. These include CanFin Homes, HAL and Dixon Technologies, among others. They have been added on the basis of the stock selection criteria of SEBI.