Often, we spot headlines that NSE has banned some stocks in the F&O segment. But what causes it, and what are the criteria to include stocks in F&O. Let us delve deep and find answers to all those questions.
Futures & Options are types of derivative instruments that derive their values from the underlying assets.
SEBI is responsible for setting and amending the inclusion criteria for stocks and indices in the F&O segment.
Following the circulars issued by SEBI, the exchanges(BSE & NSE) lay down the criteria for stocks and indices to get introduced in the F&O segment.
Eligibility criteria for stocks for F&O trading
Enhanced eligibility criteria for inclusion of stocks for F&O trading as per SEBI circular SEBI/HO/MRD/DP/CIR/P/2018/67 is as follows
- The stocks are chosen from the top 500 listed companies for average daily market capitalization and average daily traded value of six months on a rolling basis.
- The median quarter-sigma order size for a stock should not be less than ₹ 25 lakh in the last six months. Here, a stock’s quarter sigma order size means the order size (in value terms) that can cause a change in the stock price equal to one-quarter of a standard deviation.
- The Market Wide Position Limit in the stock shall not be less than Rs 500 crores.
- The average Daily Delivery value in the cash market shall not be less than Rs 10 crores for six months on a rolling basis.
The stock should meet all the conditions mentioned above calculated on six months rolling basis to qualify for the F&O segment.
Exit criteria for stocks from the F&O segment
Stocks currently trading in the F&O segment will get disqualified if they fail to meet the qualifying conditions mentioned in enhanced eligibility criteria from May 2019 as specified in the SEBI circular SEBI/HO/MRD/DP/CIR/P/2018/67.
Sometimes, stock exchanges(NSE & BSE) also ban stocks from the F&O segment to curb excessive speculative activities. The stock exchange imposes an F&O ban when the stock’s aggregate open interest crosses 95 percent of the market-wide position limit or MWPL.
Open interest refers to all outstanding buy and sells positions in the security or futures and options contracts. Read more about the F&O ban here.
Eligibility criteria for indices for F&O trading
- F&O contracts for indices will be issued if 80% of the index constituents are individually eligible to trade in derivative contracts.
- The ineligible stocks should not weigh more than 5% in the index.
- The conditions are reviewed every month.
- If an index fails to meet the conditions continuously for three months, it gets dropped from the segment, and no new F&O contract is issued.
- Any unexpired contract remains valid till expiry, and a new strike price is introduced for the existing F&O contracts.
We learned that exchanges carry out inclusion and exclusion exercises annually, abiding by SEBI rules.
Exchanges also periodically revise eligibility criteria to ensure investor protection. It involves modifying the benchmark liquidity levels for scrips to do away with the illiquid scrips and to ensure that only high liquid stocks are in F&O. The inclusion/exclusion of scrips is used as a yardstick to realise their performance.
Next time when you read about the inclusion/exclusion or ban of scrips in F&O, you know why it is done and how to make use of it to optimise your portfolio.