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Impact of F&O ban on Share Price?

11 January 2022
4 minutes

You might have come across reports of certain stocks entering the F&O (Futures and Options) ban list. In many situations, your broker must have also told you that no new positions will be available since the stock is on the F&O ban list. Have you ever wondered how a share can enter the F&O ban list and what does it mean? Wondering what happens to the share price of a stock in the F&O ban list? Read on to know more!

What is an F&O ban, and how does it work?

Trading in Futures and Options takes place in the derivatives market. Under certain circumstances when the stock exchanges feel the sanctity of trades is getting harmed and may endanger traders, they ban F&O trading in a particular stock. The ban is only on a specified stock(s) and not on the entire derivatives market. (Note that the exchanges may also trigger a market suspension in stocks, bonds or forex markets). When a specific stock is said to be on the F&O ban list, it means that the traders won’t be able to open any new or fresh positions on that stock in the derivatives market unless the ban is lifted.

The whole point of putting a selected stock in the F&O ban list is to tackle the excessive upsurge and speculative trading in that stock. The only trading that the stock exchange permits in that specific stock in the derivatives market is that traders may exit their positions or square up their positions. If traders try to take fresh positions on a stock that has been put in the F&O ban list, they are levied a penalty which is 1% of the value of the increase in position. However, they can sell as many lots for this particular stock.

When does a stock enter an F&O ban?

A stock enters the F&O ban list when the stock’s open interest crosses the 95% mark of the market-wide positions limits (MWPL). Open interest refers to the maximum number of open positions that can be open at a given time. MWPL can be understood as 20% of the company’s total shares held by non-promoters. For example, if a company ABC has 100 shares, out of which non-promoter entities hold 70% or 70 shares, the MWPL position for ABC will be 140 shares.

As per the stock exchange’s rules, the open interest in a company’s stock must not exceed 95% of these 140 shares. Therefore, the outstanding open position for this stock cannot be more than 133 shares. If the F&O positions in ABC stock exceed 133 shares, the stock will be put on the F&O ban list. This is also why it is extremely important to have a sharp eye on the free float capitalization of the stock when it starts to fall. The period of the ban is not predetermined. The stock will be removed from the F&O ban list only after the open positions come down to 80% of the MWPL, and traders will then be allowed to take new positions in the stock

Impact of F&O ban on share price

Banning certain stocks from the F&O trading list is one of the many ways the stock exchange uses to regulate the speculative activity of some traders in the derivatives market. Such activity, if left unattended, can lead to instability in the market, resulting in dipping investor sentiment across the market. A stock may also be put in the F&O ban to control the volatility in the stock. For example, Delta Corp was recently put on the F&O ban list after it rallied over 8% in three consecutive trading sessions. Nevertheless, putting certain stocks on the F&O list can significantly impact the share price of that stock. After all, investors who bought Futures and Options for a certain stock will have to square off their positions after being forced to cut their profits. Although this trade largely happens in the derivatives market, it can also lead to a jolt in the spot market. Traders having to dump their positions may also have a negative impact on the stock in the larger market.

The bottom line

Trading in Futures and Options involves a lot of attention to finer details which can help make or break fortunes. While a stock being put in the F&O ban list may not directly impact the price of the stock, it is essential to know how the move happened. Technical and fundamental analysis of the stock may help you understand the worrying trends in the stock, if any.

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