F&O Ban Explained with Example

More often than not, traders can find certain stocks being banned in which no fresh po- sitions in futures and op- tions (F&O) contracts can be initiated. So, what is this F&O ban, when does a stock enter the ban period and what is the criteria? To know this, one should understand what is Market Wide Position Limit (MWPL). MWPL for a stock is 20 per cent of the number of shares under free-float - shares owned by non-promoters. When aggregate OI in fu- tures and options across ex- changes exceeds 95 per cent of MWPL at the end of a day, that particular stock will come under F&O ban from the next day. Normal trading will resume when aggregate OI drops to 80 per cent of MWPL. For instance, let us as- sume that the total number of shares outstanding in Company A is 2,000 and out of this, 1,000 shares are free- float. So, MWPL for this scrip is 200 shares (20 per cent of 1,000). Here, when the aggregate OI of this stock exceeds 95 per cent - 190 shares, the scrip will enter F&O ban. Thereafter, normal trad- ing will resume if OI falls be- low 160 shares. While traders can exit po- sitions they initiated before the ban, creation of new pos- itions will attract penalty of 1 per cent of the value of in- creased position, subject to minimum of ₹5,000 and maximum of 1 lakh.