Future and Options stock selection criteria: StoxFactor explains

How stock exchanges do stock selection for Future and Options trading? - StoxFactor explains

NSE allows only about 140 (at the time of writing this post) stocks on which future and options trading can be done. These numbers can vary month on month as the the number of stocks meeting the eligibility criteria changes. 

But how does NSE or any other stock exchange decide these stocks? What are the eligibility criteria? In this post, we will try to identify the selection criteria for these F&O stocks.

The selection criteria are as follows:

• Subject to approval of SEBI
• Average Daily Market Capitalization - computed on the 16th of each month, on a rolling basis
• Average daily deliverable value - computed on the 16th of each month, on a rolling basis in the previous six months
• Average Daily Traded Value - computed on the 16th of each month, on a rolling basis
• Quarter Sigma Values - considering the order book snapshots of securities in the previous six months
• Market wide position limit (Number of shares) - valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract for the previous month

Furthermore, the following eligibility criteria is considered by the exchanges:

• The security should be within the top 500 stocks in terms of avg. daily market capitalization and avg. daily traded value in the previous six months on a rolling basis.
• The Average daily delivery value in cash market shall not be less than Rs.10 crores in the previous six months on a rolling basis.
• The median quarter-sigma order size over the last six months shall be not less than Rs. 25 lakhs.

Once a security fails to meet the above eligibility criteria for three continuous months, then no new contract is issued on that security. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.

Any security which was previously excluded from derivatives trading may become eligible once again. The security is required to fulfill the enhanced eligibility criteria for six consecutive months to be re-introduced for derivatives trading.

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Reference: https://www1.nseindia.com/products/content/derivatives/equities/selection_criteria.htm