Sharekhan Blog

How to Choose The Best F&O Stocks?

  • Jun 12, 2023

Before stepping into F&O journey, you must first grasp futures and options trading. Here are essential rules to keep in mind from the best f&o tips provider:

The first rule is to focus on highly liquid F&O equities alone.

There is a time crunch while making choices in the F&O section. It's only conceivable if the F&O stock is very liquid. Infosys Ltd., an F&O stock, is a good example because of its strong liquidity. Nearly 79,587 futures contracts valued around Rs 3,899 crore were exchanged on April 2022. The announcement of Infosys's results explains the surge in activity. 

Consequently, making trades in Infosys is straightforward. In comparison, the 18th of April 2022 saw just 831 contracts worth Rs 40 crore change hands on the MCX, making trading there less than optimal.

For this reason, the first guideline in choosing an F&O stock is to make sure that at least 3,000 contracts are exchanged on any given day.

The Second rule of F&O investing: avoid equities with low volatility.

In the F&O market, volatility really helps. Why bother with F&O equities that are stagnant? Investing in F&O stock is profitable only on sharp price swings. Therefore, you should constantly seek for and trade highly volatile equities. As of April 20th, 2022, the following table details the ten F&O stocks with the greatest daily volatility.

Take note that Infosys Ltd. has plenty of cash on hand. This contract has the largest volume of any of the 199 F&O stocks. However, the degree of volatility is negligible at best. Stocks with such a low potential return are not something we want to purchase.

The ideal conditions for a F&O stock are when it has a high liquidity, a high volatility, and is not in the ban period.

Third rule is to stay away from any stocks on the F&O Ban list.

The F&O ban list is analogous to the F&O stock list. The National Stock Exchange regularly disseminates this ranking. All the equities that can't be traded on the F&O market are here. For instance: On April 21, 2022, TATA Power Ltd. appeared on the F&O suspension list. The NSE platform makes the restricted F&O list easily accessible. To see the restricted items list for F&O, please click here.

You may be asking at this point how a stock might get up on the F&O prohibition list. The Market Wide Position Limit (MWPL) and the total open interest form the basis of this simple computation (OI). When the combined open interest in stock reaches or surpasses 95% of the MWPL, the stock is added to the F&O ban list. If the total OI does not drop below 80% of MWPL, the stock will remain on the F&O prohibition list. Among the many prohibited asset classes on the F&O platform is stock trading.

Following these three guidelines can help you quickly identify the top F&O stocks.

These articles have been prepared by Sharekhan and is not for any type of circulation. Any reproduction, review, retransmission, or any other use is prohibited. Sharekhan shall not be responsible for any unauthorized circulation, reproduction or distribution of this material or contents thereof to any unintended recipient. Kindly note that this page of blog articles does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The value of the investments may be affected generally by factors affecting financial markets, such as price and volume, volatility in interest rates, currency exchange rates, changes in regulatory and administrative policies of the Government or any other appropriate authority (including tax laws), or other political and economic developments. Please note that past performance of financial products and instruments does not necessarily indicate the prospects and performance thereof. The investors are not being offered any guaranteed or assured returns. The securities quoted are exemplary and are not recommendatory. While we would endeavour to update the information herein on a reasonable and timely basis, Sharekhan, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of use of the trading platforms mentioned herein. The trading avenues discussed, or views expressed herein may or may not be suitable for all investors. This information is only for consumption by the client, and such material should not be redistributed.

Team Sharekhan
by Team Sharekhan

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