Data update on:
Market Wide Position Limit (MWPL) is widely used parameters in analysis of stocks that trade in the derivative segment. So why traders use it and does knowledge of MWPL statistics provide any edge to your trading decisions? To find out, let's begin with answering the question - What is Market Wide Position Limit or MWPL?
MWPL is basically the maximum number of open positions allowed on futures and option contracts of a particular underlying stock.
Mathematically speaking, MWPL should be lower of either 30 times the average number of shares traded daily during the previous calendar month in the relevant underlying security in the underlying segment or 20 per cent of the number of shares held by non-promoters in the relevant underlying security, i.e. free float holding. For example, if the equity base of a company consists of 1000 shares with non-promoter holding at 40% (400 shares), the market-wide position limit for the stock will be 80 shares (20% of the 400 shares). As per exchange rules, at the end of the day, outstanding open positions in the security should not exceed 95% of this 20% limit. So in the above case, outstanding open positions should not be more than 76 shares (95% of 80 shares). If that limit is exceeded, the scrip enters ban period and the exchange bans traders from taking fresh positions till open positions are unwound and come down to 80% of MWPL. As we now understand what MWPL is, let's plot the Market Wide Position limit of all the FnO stocks and check if the chart reveals any insight.
There is definitely something interesting about the plot. Here are some observations. On the left side are the FnO stocks with relatively lower free float (non promoter public holding) and on the right side are the stocks with higher free float.
- Lower free float at times leads to unusually high stock price (high does not mean expensive), more volatility and vulnerability to enter the ban period, however all three need not be simultaneously true for a particular stock.
- Higher free float on the other hand leads to better liquidity, reduced volatility and less vulnerability to enter the ban period.
Look at some of the names in extreme left and extreme right region of the chart and then you can relate to the observations above. To gain further insights, let's look at the Percentage Combined Open Interest of all the FnO stocks. If you don't know what Percentage Combined Open Interest is, here is the formula to calculate it:
Percentage Combined Open Interest of a Stock = ( Combined Open Interest across all FnO contracts of the Stock / MWPL of the Stock) * 100
If the total OI for any scrip exceeds 95% of the MWPL set by exchanges for that scrip, then the scrip goes into ban period in F&O. In other words, if Percentage Combined OI of a stock exceeds 95%, then it's in ban period. As explained above, once in ban period, the stock could be traded only by offsetting existing positions (long liquidation or short covering) till the open interest comes down to 80 per cent of the market wide position limit. Let's plot the % combined open interest data of all FnO stocks along with their yearly average.
So the story unfolds further clearly demarcating relatively safer stocks (to the left) from the speculative once (to the right). Do focus on the kinks where the divergence is unusually high from the average % combine open interest. Try to figure out the reason for such large divergence, for how long it has been there and was there a sudden price fluctuation round point of divergence.
Abnormal price movements along with sudden change is % combined OI clearly indicates that there is trading opportunity.
Once you have identified the stocks with abnormal divergence from above chart, you can do a detail second level analysis by plotting the historical % combined open interest and price movement of the stocks of interest below:
Plot % Combined Open Interest of Individual Stocks
Data update on:
Once we are done with analysing the divergent stocks, let's focus our attention on stocks which are either already in the ban period or are approaching the ban period (the real magic starts once the stock enters the ban period). Generally speaking, being in ban period or crossing the 95% threshold implies that only square-offs will take place in that particular scrip. So either the longs will get liquidated i.e. long unwinding or shorts will be covered i.e. short covering. As no new positions will be opened, the stock price should remain depressed till the long unwinding or short covering stops. Also stocks that are very near their MWPL limit (95% of MWPL and about to enter the ban period), might witness sudden spurt in %MWPL as traders will prefer to offset positions to prevent the scrip from entering the ban period. Availability of this information beforehand enables traders to make an informed decision about going long or short in such scrips that trade near MWPL limit set by the exchanges. Here is the list of stocks which are either in ban period or approaching it fast as compared to others:
Here is the list of stocks which have been frequenting the ban list (since 2018). Do check if your target stock falls into this list. If so, then you need to be more careful. For instance, if the free float of the stock is low, it is vulnerable to manipulation by influential traders. There have been quite a few instances of unusual rise in spot and future prices when a counter has been under the F&O ban status. By the way, do you spot a common trait of the stocks in the table below? Does the word Wealth Destroyers ring a bell? If yes, then be extra careful while trading or investing in these stocks.
Spend some time to understand how a particular stock behaves when near and in ban period
Rather than jumping straight into trading, it's advisable to first create a list of target stocks and study their behavior near ban period. After that, you should spend some time paper trading and back testing your strategies. Once comfortable one can take the real plunge.