Sharekhan Blog

What is F&O Ban?

  • Apr 14, 2024

Traders must be aware of the F&O limitation since it prevents them from opening new positions in prohibited stocks while the ban is in place.

F&O Ban Meaning

The term F&O ban means a temporary prohibition on trading specific equities in the futures and options market. When open interest (the total number of open contracts in futures and options) in any stock surpasses a predetermined percentage of the market-wide position limit, the ban is activated. It's basically a safety measure that stock exchanges use to stop excessive speculation in a specific stock.

Trading in the futures and options of that stock is prohibited while there is a stop-deal order. All they can do is reduce or stop trading. This prohibition will remain in place until the open interest falls to a safer level and helps regulate stock trading. Now that you have a basic understanding of what is f and o ban, let’s uncover the reasons stock exchanges impose them.

Reasons Why Stock Exchanges Impose F&O Bans

Stock exchanges impose an F&O ban list as a preventative measure to preserve market stability. Significant price volatility might result from unduly aggressive trading activity in a stock's futures and options. Not only may this volatility be dangerous for individual traders, but it can also impact the stock market's general health. Exchanges seek to prevent excessive speculative trading, which frequently distorts a stock's true value, by enforcing an F&O prohibition.

These prohibitions also act as a safeguard against market manipulation. Without such rules, big traders might be able to unjustly affect stock prices, creating an unequal playing field. F&O ban stocks safeguards the interests of all market players by preventing any party from having an excessive impact on the market.

Influence of F&O Ban on Stock Price

When a stock is under a F&O ban, only sales in the F&O section are authorised; no new purchases are allowed. What effect does this have on the stock price, then? The market's stability is threatened by excessive speculation, which also severely damages investor confidence. Thus, the primary purpose of the F&O ban is to maintain the high calibre of the stock.

Nevertheless, the stock price drops due to the prohibition on taking up new positions. If investors are ignorant of the limitations of the F&O ban, it seriously burdens them. For example, investors would not be able to take on any new positions during an F&O ban period; they could only cancel out existing positions. Since they have no other options, they can even be forced to sell the shares at a price that is normally not in their best interests.

Investors need to be aware of market rumours and monitor the possibility that a stock may go into suspension. Whenever open interest in an options contract exceeds 60% of the specified MWPL, the National Stock Exchange (NSE) trading system issues a warning. This notice typically shows up on your screen once every ten minutes.

Simplify Trading In F&O: Learn How

1. To swiftly purchase and sell F&O stocks, opening a trading account with the broker is the first step. Broking firms that are registered with the BSE or NSE are able to buy and sell these contracts.

2. After creating the account, you must select the mobile application and go through the available options by logging into the portal.

3. Once the platform has been selected, you must look into the various F&O contracts.

4. Once you have decided to purchase the F&O contract at the striking price, you must provide the order details. This is the cost at which options, either puts or calls, are accessible.

The spot price is among the most important things to consider when negotiating a contract price. As with any asset, money, or commodity, spot pricing aids in the quick buy or sale. It is the current market price. 

Ending Note

Even though this specific discussion about the F&O ban might have painted an unfavourable picture of online trading for futures and options, investing in the derivatives market can be very profitable for those who are highly aware of the situation and possess the required knowledge and information about the market. There are other market trends that traders may find useful as well.

For instance, if a stock is added to a ban list, its price may continue to decline; nevertheless, traders frequently see that the price of the shares usually rises again after the stock is taken off the ban list.

Team Sharekhan
by Team Sharekhan

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