In the Indian derivatives market, the Futures & Options (F&O) segment is one of the most traded arenas. However, some stocks appear on the F&O ban list several times, which implies that traders cannot initiate new derivatives positions in those securities. Understanding this is a key element for all new and experienced traders. In this blog, we will explore the reasons behind the repeated entrance of some stocks in the F&O ban list.
What triggers an F&O ban?
According to the rules of the Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE), a stock will be placed in the F&O ban zone if its Market Wide Position Limit (MWPL) exceeds 95% of the total open interest. The MWPL is calculated on the basis of the free float market capitalisation of the stock and is aimed at preventing market concentration in the derivatives.
When the security crosses this 95% mark, no new positions (buy or sell) in the futures and options contracts are permitted in that stock. However, traders can square off existing positions or exercise options. The ban stays in place until open interest drops below 80% of the MWPL.
Why do some stocks repeatedly enter the ban zone?
There are several reasons that lead to the repeated occurrence of some stocks in the F&O ban list. Some of those reasons are listed below:
Limited free-float and high retail participation
Stocks with relatively smaller free float market capitalisations have lower position limits and are therefore more prone to hitting the threshold. When retail traders are taking aggressive positions in these stocks, the cumulative open interest quickly approaches the limit and results in an F&O ban.
Mid-Cap and some large-cap stocks with substantial promoter holdings also fall into this category. Their small floating stock translates to restricted derivative position limits and, therefore, causes their frequent entries into F&O ban zones during volatile times.
Event-driven speculation
Stocks approaching any major corporate events (earnings reports, merger news, regulatory decisions, or business news) experience an increase in derivative trading as speculators gamble on the outcomes of these events. This concentrated speculative activity creates an open interest.
For example, there is often increased F&O activity in banking stocks during monetary policy announcements or quarterly results. Thus, stocks like Axis Bank share price can experience increased derivative positions during these periods, which occasionally pushes it toward ban thresholds.
One-sided market sentiment
When market participants have a strong consensus in either a bullish or bearish direction on a stock, it results in concentrated position-building on one side or the other. This lopsided accumulation rapidly consumes the available position limits and results in an F&O ban on trading activities.
Short-squeeze also contributes to the F&O ban. When heavily shorted stocks begin rising, short-covering increases the concentration of open interest as traders scramble to exit positions, which ends up pushing the stock into the NSE ban list.
Lower liquidity in the cash market
Stocks that have poor cash market liquidity relative to their derivative volumes face structural issues. When derivative trading significantly exceeds the underlying stocks’ availability, the position limit gets violated easily.
Algorithmic and high-frequency trading
The rapid adoption of algorithmic trading strategies has contributed to rapid open interest accumulation in some specific stocks. When more than one algorithm identifies the same opportunities to trade, their collective action in building positions sends the stock above the buy limits.
Conclusion
Frequent F&O ban zone entries are the result of a combination of structural factors like the limited free-float, concentrated speculation and liquidity mismatch, and it is not an isolated event.
Understanding how these dynamics interact would help traders predict when a ban could kick in and align their strategies to follow the regulatory framework designed to keep markets stable and fair.
