Due to the sheer potential for loss in the market, online trading is subject to the stringent oversight and regulation that characterises all other activities conducted on stock exchanges. Dealing in futures and options is subject to a number of regulations and limitations, including the F&O ban, which is one of these regulations. Traders should be aware of the F&O restriction because during the period in which the ban is in effect, they will not be allowed to open new positions in equities that are subject to the ban.
If a stock is traded in the derivatives market in futures and options, it is subject to a trading limit known as the MWPL. This is a stock exchange limit that specifies the maximum number of contracts that can be open at any given time. This is known as open interest, and it includes all outstanding buy and sell positions in futures and options contracts. MWPL is either negative or positive.
When the aggregate demand of a specific security exceeds 95% of the MWPL, all F&O contracts in that stock are subject to a trading halt, which is known as a F&O ban. There can be no new positions created for any of the F&O contracts in the stock during the ban period. During the ban time, a trader will be limited to the already opened positions. The prohibition is lifted when the open interest in the stock falls below 80%. It is vital to emphasise that the F&O bans only apply to equities, not market indexes. Traders who trade in indexes are unaffected by F&O prohibitions.
The F&O ban is a regulatory regulation designed to avoid excessive increase and speculative intraday trading. When market speculation in respect to a stock exceeds a certain limit defined by the stock exchange, the stock exchange places the stock under F&O ban. To prevent excessive speculation, when a stock enters the ban period, no new positions can be opened for that stock. During this time, the only type of trading allowed is to exit existing positions or square off existing positions.
The impact of the F&O prohibition on the values of shares subject to the ban period is enormous, and every trader interested in futures and options should be aware of this. As previously noted, stock exchanges place certain stocks on the F&O ban list to curb excessive speculative behaviour in the market about that stock. Excessive speculation undermines the trading market's stability and can be tremendously damaging to investor sentiment across the board. The F&O ban, which prohibits trading in stocks on the ban list, is also used to regulate the stock's high volatility. Because of the trade limitations, the price of any stock on the ban list is constantly decreasing. It is also influenced by the fact that investors who have established positions on the stock, such as buying futures and options, are compelled to square off their positions, which means they must decrease profits on their trades.
If investors were unaware of the restricted period when they opened their interests in an entity, the F&O prohibition places a significant burden on them because they will be required to close out their positions in the company. They will be forced to liquidate their shares at a price that is almost certainly going to be unfavourable to them as a result of the lack of other options available to them. Investors need to be aware of market speculations and always be on the lookout for the possibility that a stock may enter the prohibition period so that they can avoid this kind of loss. A warning is issued on the National Stock Exchange's trading system whenever the open interest of futures and options contracts in a stock exceeds 60 percent of the predetermined MWPL. This is an important feature in this regard, and it is provided by the National Stock Exchange. The warnings appear on the screen once every ten minutes.
Excessive speculation on a company, particularly when it affects its free float, can pose a major risk to small investors. A stock's free float is a measure of the availability of equities in the stock market for public investment. Investors with nefarious intent may attempt to abuse such events in order to manipulate stock liquidity. As a result, traders must be exceedingly cautious and observant when trading futures and options.
Despite the fact that this particular discussion on the F&O ban may have projected a negative scenario in terms of futures and options online trading, trading in the derivatives market can be extremely profitable for investors if they are highly alert to the situation and have the necessary market related information and knowledge. There are certain market patterns that can be advantageous to traders as well. For example, the price of the stock may continue to fall once it is placed on the ban list; but, a regular tendency observed by traders is a rebound in the price of the shares once the stock is removed from the ban list.