Why does a stock go ban in F&O?

A stock goes ban in F&O to curb excess speculative activity, when its derivative contracts cross 95% of the market-wide position limit (MWPL). In other words, when the combined open interest in all the option and futures contracts for all the months taken together crosses 95% of MWPL, stock is ban in F&O.

Once ban, trade in the derivative contracts is allowed only to decrease positions through off-setting positions till the normal trading in the scrip is resumed. In other words, no new / fresh contracts are permitted, but intra-day trades are allowed, as they do not alter the open interest. Any increase in open positions attracts penalty of Rs. 5,000 per contract. The stock goes out of the ban i.e. normal trading in F&O contracts of the stock resumes only after the aggregate open interest across the exchanges comes down to 80% or below of the market wide position limit.

Example:

On 6th January 2014, Apollo Tyres was ban in F&O trade. Its market wide position limit for January 2014 was 5.695 crore (as per NSE release). On 3rd January 2014, open interest in Apollo Tyres stood at 5.341 crore aggregate of Jan Futures, Feb Futures, March Futures, Jan Option, Feb Option and March Option) which was 94% of the MWPL.

This brings us to the next question - What is Market Wide Position Limit (MWPL)?

Market wide position limits, applicable only for stocks (all option and futures position) and not on index derivatives, is expressed in terms of number of shares. It is the lower of:

1. 30 times average number of shares traded daily, during the previous calendar month, in the cash segment of the exchange, or
2. 20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company.

Stock Exchanges release the MWPL for each of the stocks traded in the derivatives segment on a monthly basis.