The word comes from the French word, lever, to lift up.

 

If you’ve used a lever with a fulcrum, to move a heavy and large object, you know the force is amazingly powerful. Investors use leverage to multiply their buying power in the market. As initial margin suggests, in order to buy 1 futures contract, the trader needs to pay only a small percentage of the total value of the contract, one could think of it as, larger exposure to an underlying asset with very small initial margin. This is leverage, gains and losses in such scenarios is manifold.

An illustration: If the initial margin required is 20% for a futures contract. This implies that if the underlying equity returns 10%; due to leverage (as one doesn’t pay the entire amount) in futures contract; the percentage returns would be magnified to Equity returns*100/initial margin, i.e., 50% in this example.

 

In order to avoid excessive concentrated speculation, cartelisation to such an extent that it has a large bearing on the price of an F&O stock, hence barriers or limitations need to be placed in terms of positions held, namely, market wide position limits.

 

Market Wide Position Limits (for Derivative Contracts on Underlying Stocks)

 

Daily at the end of day, NSE disseminates the aggregate open interest across all Indian Exchanges in the futures and options on individual scrips along with the market wide position limit for that scrip and tests whether the aggregate open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If yes, the Exchange takes note of open positions of all positions as at the end of that day in that scrip, and from next day onwards the aforementioned scrip enters the Ban list. Traders should trade only to decrease their positions through offsetting positions till the normal trading in the scrip is resumed.

 

The normal trading in the scrip is resumed only after the aggregate open interest across Exchanges comes down to 80% or below of the market wide position limit.

 

 

Position limits of Trading members / FPIs (Category I & II) / Mutual Funds

 

The position limits of Trading members / FPIs (Category I & II) / Mutual Funds in equity index option and index futures is mentioned as under:

The position limits of Trading members / FPIs (Category I & II) / Mutual Funds in equity index futures contracts is higher of Rs.500 crores or 15% of the total open interest in the market in equity index futures contracts. This limit is applicable on open positions in all futures contracts on a particular underlying index.

The position limits of Trading members / FPIs (Category I & II) / Mutual Funds in equity index option contracts is higher of Rs.500 crores or 15% of the total open interest in the market in equity index option contracts. This limit would be applicable on open positions in all option contracts on a particular underlying index.

An underlying security which trades in the F&O segment of the Indian exchanges, is said to have entered Ban list in the derivatives segment, when the outstanding open positions in derivative segment stand at 95% of MWPL of the underlying security. If that limit is exceeded, the scrip enters ban list and the exchange prohibits traders from taking fresh positions till open positions are unwound and outstanding open positions come down to 80% of MWPL.

Monitor stocks in the Ban list via Quantsapp data analytics utility, enables traders to get a ready perspective on it. Quantsapp utility also shows the potential entrants into the ban list and also, indicates the potential exits.

The data analytics that hide here is the sentimental extreme. There is a utility in Quantsapp called Ban Historical or Ban Hist which gives us number of symbols in F&O that has been in Ban list in recent times. This historical analysis helps us in identify sense of extreme. It may not be tradable but definitely a supporting analytic. 

Open interest in Futures is the number of unsettled or open contracts for a particular expiry.

The position limits of Trading members / FPIs (Category I & II) / Mutual Funds in equity index futures contracts is higher of Rs.500 crores or 15% of the total open interest in the market in equity index futures contracts. This limit is applicable on open positions in all futures contracts on a particular underlying index.

It is a amount of open interest or unsettled position, a trading member or FPI or Mutual funds can carry on a particular day, in a particular underlying.

Open interest in Futures is the number of unsettled or open contracts for a particular expiry. Similarly, open interest is the number of unsettled contract for a particular strike, particular option type, expiry and specific underlying, in case of options.