How To Prevent Shares From Entering Trading Ban In Futures & Options

by Vinaya HS on September 24, 2017

in Finance

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There has been an upward trend in the number of stocks entering the trading ban in the segment of futures and options. It was seen that before the June expiry, the shares of as many as 14 companies were banned by the National Stock Exchange for the reason that their aggregate OI or open interest positions in these scrips had gone beyond the 95% of the market wide position limit.

After the aggregate OI or open interest across exchanges falls below 80% the market wide position limit, then only the regular trading in the script is recommenced. Until then the trading members can carry on their trade just to reduce their positions by counterbalancing them till the normal trading in the stock is restarted.

As the rules say, the market wide position limit should be lesser than 30 times the average number of shares traded on the daily basis as on the previous calendar month in that particular security in the equity segment or 20% of the number of free float shares or the shares that are held by the non-promoters.

The number of stocks which are on the rise under trading ban even at the beginning of the week-2 of the futures and options cycle, the sincere traders and investors are having a difficult time to make an entry in the derivative segment.

As per the Nifty future news, there are several doubts that there are a few operators who are taking the advantage of the situation as they are not allowing others to take a position in contra to their holding by entering the cheap deep out-of-the-money options. It is expected that if the existing norms are changed, it will lead to a better situation which will also better the efficiency and liquidity in the derivative or F&O market. It will be better if instead of existing 20% free-float, if at all it can be increased to a 30% to 35% or even to 50%, it can increase the average number of shares traded up to 30 times. This will create more relaxation and better avenues for the traders of F&O segment.

Also, as compared to the existing rule of adding all open positions across derivatives to calculate the limit, if the limit can be compartmentalized between futures and options by dividing the total limit between them in the ratio of 30:70 or 40:60, nothing like it. For example, if the limit is 20 lakh for an underlying asset, six lakh can be allocated to the futures segment and the rest to options segment. This will help in safeguarding the incessant trading in the contract especially in the futures.

Talking about the segment of Nifty option chain, deep out-of-the-money options should be given limited space as it will allow the near and at-the-money options to be made more liquidized.

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