Market Wide Position Limit Data Analysis - Analyse MWPL Data

Market Wide Position Limit (MWPL)

Market Wide Position Limit (MWPL) is one of the key parameters in analysis of stocks that trade in the derivative segment. At the end of each day NSE and BSE disclose the total open interest data (NSE, BSE, MCX) of all the stocks trading in derivative segment along with the MWPL for that scrip. 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. 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. With the Equityfriend MWPL tool, traders can very easily identify which stock is in ban period and which are approaching the ban period. Traders can see the whole MWPL data or can select individual stocks to check their MWPL status and next day limit. The data is updated on a daily basis from Nse India website.

What is Market Wide Position Limit or MWPL in derivatives?

The market wide position limit (MWPL) is basically the maximum number of open positions allowed on futures and option contracts of a particular underlying stock. It 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.

How to use Equityfriend Market Wide Position Limit Tool to build a trading strategy in derivatives?

With the Equityfriend MWPL tracking tool, traders can easily monitor OI% of all the scrips that trade in F&O segment and track those stocks which are in ban period or are very near their MWPL limit (95% of MWPL) is about to enter the ban period. These scrips 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.
Generally speaking, closeness of OI to 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. Smart Traders can capitalise on this behaviour and build an appropriate trading strategy for short term gains in stocks which are approaching ban period. An appropriate strategy can be to either short sell the stock or buy the put of suitable strike price. However, traders should not use this strategy as a thumb rule and do some paper trading to understand the price movements well before entering into any trade. For instance, if the floating stock in a certain stock future 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.

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