All stocks trading in the F&O segment have a MWPL (Market wide position limit). This is the maximum number of contracts which can be opened at any point of time (open interest). This can be long or short positions; the direction does not matter. If the open interest of any stock crosses 95% of the MWPL(Both F&O contracts of that stock), stock enter a ban period.

In such a case, no fresh positions are allowed in that stock. You will only be allowed to exit the existing positions during this period. The ban is reversed only if the open interest falls below 80%.

Earlier, you were allowed to rollover to any of the existing contracts (at any time there are three contracts available – current month, next month and the far month) provided your overall Open interest position does not increase. However, since March 2020 due to a SEBI circular, now you can only exit/square off your position in the current month and cannot rollover to next or far month. This usually leads to significant volatility especially around the monthly expiry.

It can be argued that since we are a long only, cash positions portfolio – the ban period entrance/exit does not matter. But it has been observed that if a certain portfolio stock remains in ban period for significant periods of time, the volatility in the portfolio increases. We have analysed last 7yr data for portfolio stocks to check duration of ban period.

As a result, we have implemented the following portfolio structuring points to reduce the volatility:

(a) A maximum of 33% weightage will be given to F&O stocks in any strategy.
(b) Bottom percentile will be given to stocks which often come in ban
(c) A maximum of 10% overall allocation should be given to stocks which often come in ban.

These allocations have already been implemented in the portfolio. This does not warrant an immediate action if you have already implemented the changes. We just wanted to communicate our thought process in an attempt to reduce portfolio volatility for frequent F&O ban stocks.