Traders and investors in the stock market often take positions in Futures and Options (F&O) segment. The F&O segment is very popular among the investors as it gives an opportunity to earn higher returns on investment.
Though it is an appealing concept, there are a lot of technicalities in F&O trading. Many investors face the problem in understanding the basic terms of F&O market. One such term that the participants come across while trading in the F&O segment is security ban or script ban. It is very important to understand the meaning of scrip ban in F&O before trading in this segment.
In this article, we shall understand how a security in F&O comes under a ban and its implications on the investors/traders.
Meaning of Scrip Ban
When any security under derivatives contract crosses 95% of Market Wise Position Limit (MWPL), then in that scenario the security comes under F&O ban. This situation arises when the combined open interest for the entire futures and options contract for all the months taken together crosses the mark of 95% of MWPL.
Before going ahead let us understand the meaning of the term Market Wise Position Limit (MWPL).
Market Wise Position Limit (MWPL)
Market Wise Position Limit (MWPL) is an expression in terms of the number of shares. The stock exchange releases the MWPL for every stock in F&O segment on a monthly basis. It is applicable only on stocks that are part of futures and options. It is not applicable on index derivatives.
MWPL is lower of the following:
- 30 times of average number of shares traded regularly, in the cash segment during the previous month, or
- 20% of the non-promoters shares i.e. 20% of the free float number of shares of the company.
The next most important question that arises in the minds of the traders or investors is that when the scrip is in the ban, does the trading stops? Well, the answer is no. During the period when the scrip is in the ban, the traders can trade in that security only to decrease their position in the stock. This is done through off-setting the position until the normal trading is resumed in the stock. To put in other words, the traders are allowed to take intraday positions as it does not alter the open interest. However, the traders are not allowed to take positions in form of new or fresh contract.
What If Trader takes New Positionduring Scrip Ban Period?
It is very important to understand that as per the rules, the traders are not allowed to take new or fresh positions in stocks which they are in F&O security ban. But, if someone takes a fresh position, then there is a penalty to it. Any new addition in open positions shall attract a penalty of Rs. 5,000 per contract or 1% of value of lot, whichever is higher. Therefore, the consequences must be known before taking any new position in the security during the ban period.
The next important question that comes to the mind is when the normal trading in F&O security ban resumes?
When Does Normal Trading In F&O Resumes?
Normal trading in F&O stocks can resume when the stocks are out of the ban. When the stock is in the ban, trading in the derivative contracts is allowed only to reverse the position that is held by the trader. The stock comes out of the ban in the F&O trading only when aggregate open interest comes down to 80% or below the market wise position limit on the exchange.
So this was all about script ban in the F&O segment. To learn more concepts of the stock market, refer to our blog on www.indiratrade.com.
About Indira Trade
Indira trade provides premium financial services to the client. Our services include trading in stocks, currency, commodity and derivatives. Our team of experts recommend F&O stocks to the clients and guide them towards taking the right position in the market.
We keep our clients aware of the securities that are in the ban and those in which normal trading in F&O can be done. Our mobile application allows you to trade on the move. The application interface is user-friendly and easy to use. Apart from this, we also recommend stocks based on the technical and fundamental analysis. So, open a demat account with us and enjoy hassle-free trading. Reach us via email or phone for any information or query. We will be happy to serve you.