Futures and Options - Rules and Regulations



In our previous topic, you must be wondering about futures and options in the derivatives market. However, these benefits are not applicable to all securities. You can trade only specified securities that are on the F&O stock list.

There are more than 170 securities on the F&O stock list mentioned by the Securities & Exchange Board of India (SEBI).

Based on SEBI guidelines and other surveillance measure has been followed by the exchange for selecting stocks and indices for F&O contracts.   




·       The stock will be chosen from the top 500 stocks in terms of average daily market capitalization (no of shares * current market price)

·       Then it will consider the average daily traded value in the last six months on a rolling basis.

·       The median quarter-sigma order size should not be less than 25 lakh

·       Market-wide position limit should be great than or equal to 500 crores not less than that.

·       Average daily delivery value in the cash market should be greater than 10 crores.


Most will be having confusions in your mind, some technical terms are new and never heard, let us have a brief discussion about the terms.

Median Quarter-Sigma Order size (MQSO):


MQSO means the order size required (based on value) to cause a change in the stock price equal to one-quarter of standard deviation. Again one more statistical term.


What is the standard deviation?

It is a measure of the amount of variation from the mean value.


Market Wide Position Limit (MWPL):


·       It is a maximum number of open positions allowed to trade in futures and options stocks.

·       The market-wide position limit is 20% of the free-float market capitalization of the stock.

·       Free float market capitalization means non-promoter holding stocks traded in the secondary market.


All you know about the criteria. Let us have a discussion on the settlement of F&O stocks.

For example, all the criteria are met by any stocks in futures and options that will move to a cash settlement if any of the criteria are not met for three continuous months that stock will move to physical settlement for one year.



Cash Settlement:


Cash settled options are contracts where the settlement is done by payment of cash at the time of exercise or expiration.

In India, index options contracts are cash-settled, and highly liquid stocks such as reliance, ITC are cash-settled most of the time.


Physical Settlement:


In case of physical delivery, the buyer of the contract will have to buy the stocks and the seller have to deliver the stocks. If any default occurs, the exchange will impose the penalty on defaulters, be careful about selecting the stocks in the futures and options segment.


Ask yourself.  Is there any possibility all the stocks have continued to F&O segments the answer is no but it has to meet the continuous eligibility criteria? Let us have a look at it.


Continuous Eligibility Criteria for Futures and Options Stocks:


·       The median quarter-sigma order size should not be less than 5 lakh.

·       Market-wide position limit should be great than or equal to 200 crores not less than that.

·       Average monthly turnover in derivative segments should be greater than 100 crores.

·       If continuous eligibility criteria not met for three months the stock will be removed from the futures and options contracts.

·       In case stock removed from F&O contracts is there any possibility to including again, yes but it has to be met the enhanced eligibility criteria for six consecutive months.



Almost we have covered the stock option eligibility criteria, what about the index option like nifty, bank nifty, and Nifty IT index.

Let us have a brief discussion on it.


Eligibility criteria of indices Futures & Options contracts on an index:


·       IT can be introduced only if 80% of the index stocks are eligible for derivative trading.

·       However, any ineligible stocks in the index should not have a weight-age of more than 5% in the index.

·       Index derivatives are permitted based on the continuous eligibility criteria.



·       SEBI has frequently modified the criteria and circulate to the exchange.

·       Before taking a trade-in F&O, you must be aware of the eligibility criteria and settlement method to avoid violation of contracts that leads to a huge penalty for the option contract holders.

·       Future & Options traders all must know about these rules and regulations before taking any position.

·       Be smart and update yourself every day. Happy trading!


Leave a Comment

Your email address will not be published. Required fields are marked *