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Selection Criteria - National Stock Exchange of India Ltd. / F&O segment: How are stocks included in the F&O segment ?

What are the criteria upon which NSE selects stocks for F&O trading ? / How are the stocks included in the F&O segment ?


Eligibility Criteria for stock selection .

The stock selection criteria for derivatives trading in India ensure that stock is large in  terms of market capitalization, turnover and has sufficient liquidity in the underlying  market and there are no adverse issues related to market manipulation. 

* Eligibility criteria of stocks for F&O Segment 

A stock on which stock option and single stock futures contracts are proposed to be  introduced shall conform to the following broad eligibility criteria:   

a) The stock shall be chosen from amongst the top 500 stocks in terms of average  daily market capitalization and average daily traded value in the previous six  months on a rolling basis.  

b) The stock’s median quarter‐sigma order size (MQSOS) over the last six months  shall be not less than Rs.10 Lakhs . For this purpose, a stocks  quarter‐sigma order size shall mean the order size (in value terms) required to  cause a change in the stock price equal to one‐quarter of a standard deviation.   

c) The market wide position limit (MWPL) in the stock shall not be less than Rs.300  crores.

The market wide position limit (number  of shares) shall be valued taking the closing prices of stocks in the underlying  cash market on the date of expiry of contract in the month. The market wide  position limit of open position (in terms of the number of underlying stock) on  futures and option contracts on a particular underlying stock shall be 20% of the  number of shares held by non‐promoters in the relevant underlying security i.e.  free‐float holding. 

* Re‐introduction of excluded stocks 

 A stock which is excluded from derivatives trading may become eligible once again. In  such instances, the stock is required to fulfil the eligibility criteria for three consecutive  months to be re‐introduced for derivatives trading. Derivative contracts on such stocks  may be re‐introduced by the exchange subject to SEBI approval.  

* Selection criteria of Index for trading

  Eligibility criteria of Indices  The Exchange may consider introducing derivative contracts on an index, if weightage of  constituent stocks of the index, which are individually eligible for derivatives trading, is  at least 80%. However, no single ineligible stock in the index shall have a weightage of  more than 5% in the index. The index on which futures and options contracts are  permitted shall be required to comply with the eligibility criteria on a continuous basis. 

 The Exchange shall check whether the index continues to meet the aforesaid eligibility  criteria on a monthly basis. If the index fails to meet the eligibility criteria for three  consecutive months, then no fresh contract shall be issued on that index. However, the existing unexpired contracts shall be permitted to trade till expiry and new strikes may  also be introduced in the existing contracts. 

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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.


That’s it for this post. Do check out my other posts to gain more knowledge about finance.
https://finosutra.blogspot.com/2020/04/financial-market.html
https://finosutra.blogspot.com/2020/04/derivative-market-ka-gyan.html


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