What is F&O BAN In Trading ?
Today’s topic is quite curious for every investor. We usually heard about F&O BAN via various news channels or through many researchers or market experts. If we talk about today, Canara Bank And Indusind Bank enters in BAN these are a fresh entries of today. When considering trading in Futures and Options (F&O), you should know that sometimes stocks carry out an F&O ban. During this period, the trader is not allowed any more fresh and new positions in the stock which is F&O banned. But they can reduce their position by selling in that stock.
What is F and O Bain? A stock ban in F&O is to prevent excessive speculative activity in that stock. Stock exchange imposes an F&O ban when the total open interest of a stock exceeds 95 percent of the market wide position limit (MWPL). Open interest securities or futures and options address outstanding buy or sell positions in contracts.
MWPL is the least of the following two figures:
– 30 times the average number of shares traded daily during the last month in the cash segment of the stock exchange.
– 20 percent of the number of shares held by non-promoters or free floating holdings.
If a trader violates the F&O ban, and takes a new or increased position in the stock, that trader will be fined 1 percent of the value of the increased position. Its maximum limit is Rs.5,000 and the maximum can be Rs.1 lakh.
However, the stock ban in F&O does not apply to intraday trade as it leaves open interest unchanged.
The F&O ban remains in force until the total open interest falls to 80% or less of the MWPL across all exchanges. After this, normal trading begins on the scrip.
F&O ban on stocks can cause huge losses to traders if the ban is imposed because they then have to transact at prices that are not favorable for them. But if they are alert then they can avoid such situations. NSE provides a feature on its trading system that displays alerts if Futures’ open interest and securities exceed 60 percent of specified market wide positions for contract securities. These alerts are displayed over a period of 10 minutes.
However, there is no MWPL for the index, so traders of index and futures options need not fear the F&O ban.
So if you are trading, you should know about F&O banned stocks to avoid losses. You should pay special attention when the stocks you are interested in have a low free float. In such a case, unscrupulous traders could use the situation to manipulate liquidity. Small traders may be particularly stuck.
It is worth noting that when an F&O ban is imposed, and no new positions are taken, the share price will continue to decline until the ban is lifted.
It is the responsibility of the stock exchange and regulatory authority to keep speculative activity under control as it can affect the stability of the market and then reduce confidence. But while trading, you should keep an eye on the MWPL limit so that you do not have to suffer heavy losses due to F&O ban.