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11 securities under ban: Rise in F&O bans hints at market overheating

“We used to see such high number of stocks in ban period in 2007-2008,” said Hemant Nahata, head of derivatives at IIFL Wealth.

, ET Bureau|
Updated: Sep 27, 2016, 04.47 PM IST
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Analysts said this suggests the market is overheated even as the volatility index (VIX) hovers above its lows.
Analysts said this suggests the market is overheated even as the volatility index (VIX) hovers above its lows.
MUMBAI: The almost unhindered run in the stock market in recent months may have made traders complacent, prompting them to mount positions in various stock futures and options positions up to the hilt.

The number of stock contracts in the equity derivatives segment which cannot be traded further till some of the positions are liquidated is currently the highest since 2007-08 — the peak of the previous bull run.

Analysts said this suggests the market is overheated even as the volatility index (VIX) hovers above its lows.

Till Monday, 11 securities were under ban in the F&O segment. A stock goes under ban in F&O when the combined open interest in its derivative contracts crosses 95% of the market-wide position limit. The normal trading in the stock is resumed only after the aggregate open interest across exchanges comes down to 80% or below of the market-wide position limit.

“We used to see such high number of stocks in ban period in 2007-2008 when 10-12 stocks used to be in ban period,” said Hemant Nahata, head of derivatives at IIFL Wealth. “Generally, now three-four stocks are in the ban period but the number has increased in the last few months”.

These include CEAT, DLF, HDIL, Indiabulls Real Estate, IDBI, Jet Airways, Jindal Steel, Jain Irrigation, Wockhardt, Reliance Communications and Reliance Capital.

“When so many stocks come under the F&O ban it indicates that the market has got overheated When there is a trigger for a fall, it can get ugly but there is no trigger yet for that to happen,” said Tushar Mahajan, head of derivatives, Nomura.
 Nahata said besides overheating of the market, the stocks going into F&O ban can also be explained by increase in lot size.

For now, derivative analysts are not expecting a major fall in the Nifty below 8500. The Nifty put option of the 8500 strike currently holds the maximum open interest among puts. The Nifty closed at 8723 on Monday

“In 2008, high number of stocks were there in ban period but at that time VIX was 70-75 and right now VIX is below 15 so the lower volatility is ruling out major correction in the market. Moreover, PCR (put-call ratio) is at a near one-year high and in terms of value, open interest in the F&O segment is close to the all time high,” said Chandan Taparia, derivative analyst at Anand Rathi.

On Monday, the India VIX rose 10% to 14.56. The VIX had hit 12.75 on September 06--its lowest levels since December 2014.

Yogesh Radke, head of quantitative research at Edelweiss said that the stocks that are under F&O ban form merely 4% of the total stock market open interest “Looking at the overall futures market open interest of Rs 1.2 lakh crore, the market surley has high leveraged position. Market participants will be closely monitoring how the rollovers pickup in the next few days as any weakness in rollover may put unwinding pressure in the derivative market,” said Radke.
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