It is common to see news headlines announcing the ban of some stocks in the F&O segment on the National Stock Exchange (NSE). But do you know the reasons for delisting and the criteria for listing stocks and indices in the F&O segment? Here’s what you need to know.
Futures and Options are two different types of derivatives. They are derivatives because their value is derived from the underlying assets.
The Security and Exchange Board of India (SEBI) sets and amends the criteria for including stocks and indices in the F&O segment. The prescribed criteria were last reviewed in 2018. Since market capitalization and turnover have increased considerably in the last five years, as of 2023, the regulator is planning to revisit the eligibility criteria for including stocks in the derivatives segment.
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To include new securities in the F&O segment, they are evaluated based on the eligibility criteria, which consider average daily traded value, average daily market capitalisation, the quarter sigma values, the market-wide position limit in the security, and the average daily deliverable value.
The list of top 500 securities is prepared by computing the average daily market capitalization and the average daily traded value on a rolling basis on the 16th of every month. A stock's average daily deliverable value on a rolling basis for the past six months and the quarter sigma order value based on the order book snapshots of securities in the last six months are computed on the 16th of every month.
To calculate the market-wide position limit, the closing prices of stocks in the underlying cash market on the expiration date for the previous month are calculated.
The ones fulfilling the following criteria are included in the F&O segment, subject to SEBI’s approval.
Each of the criteria above is to be fulfilled for six months continuously.
Index derivatives must fulfil the following criteria for inclusion in the F&O segment:
Each year, the stock exchanges perform inclusion and exclusion exercises, adhering to SEBI rules. They also review eligibility criteria to keep investors protected. This review focuses on altering the benchmark liquidity levels for scrips to remove illiquid scrips from and retain highly liquid stocks in the F&O segment. The process of including and excluding scrips is used as an indicator to understand performance.
You can leverage the news of including or excluding stocks and indices in the F&O segment for portfolio optimization on Motilal Oswal.