Stocks get banned in the F&O segment to ensure market stability and protect the interest of investors and traders. Market regulator, SEBI, sometimes places a ban on certain scripts or stocks to be traded in the F&O segment. As on September 9, 2021, NSE has banned the trading of three stocks – IRCTC, NALCO and Indiabulls Housing Finance.
A particular stock in the F&O segment is placed under a ban period when the combined open interest in the F&O segment for that stock exceeds 95% of the market-wide position limit (futures and options). Market-wide position limit refers to the total number of shares of a given stock that are allowed to be traded in the F&O segment. And these three stocks have exceeded this limit and have entered the ban period.
You check the list of banned scripts in F&O in the NSE website and the same is updated on a regular basis.
Once when a stock, say IRCTC, enters the ban period, then no trader can take position in neither futures nor options of the stock. So, if you have a position in one of the F&O banned stocks, then you will only be allowed to exit your position.
If by chance any exchange or clearing corporations increase the open position, it would attract penal order or disciplinary action against them.
Do note that this ban is only applied to stocks in the F&O segment, and not for intra-day trades or for holding.
The ban period will be effective until the market-wide position limits come down across the stock exchange or when the open interest falls below 80%.
Impact on traders
The reasoning behind banning certain scripts in F&O is twofold. One, it is to prevent speculative activities and avoid extreme volatility in the prices of the stock. And the second is to protect the interest of the small or retail traders as any increase/decrease in price beyond a certain limit (beyond the market-wide position limit prescribed) can impact the investments made and to maintain stability in the market.
So, until the position limits are exited, the price of the stock in F&O could remain weak. Now, if you are an F&O trade, you should keep an eye on the open position limits of the stock to avoid exiting in the loss in case of a ban.