The eligibility of a stock / index for trading in Derivatives segment is based
upon the criteria laid down by SEBI through various circulars issued from time
to time. Based on SEBI guidelines and as a surveillance measure, following
criteria has been adopted by the Exchange for selecting stocks and indices on
which Futures & Options contracts would be introduced.
1. Eligibility criteria of stocks
The stock shall be chosen from amongst the top 500 stocks in terms of
average daily market capitalisation and average daily traded value in the
previous six months on a rolling basis.
The stock’s median quarter-sigma
order size over the last six months shall be not less than Rs. 5 lakhs. For this
purpose, a stock’s quarter-sigma order size shall mean the order size (in value
terms) required to cause a change in the stock price equal to one-quarter of a
The market wide position limit in the stock shall not be less than Rs. 100
crores. The market wide position limit (number of shares) shall be valued taking
the closing prices of stocks in the underlying cash market on the date of expiry
of contract in the month. The market wide position limit of open position (in
terms of the number of underlying stock) on futures and option contracts on a
particular underlying stock shall be 20% of the number of shares held by
non-promoters in the relevant underlying security i.e. free-float holding.
2. Continued Eligibility
For an existing F&O stock, the continued eligibility criteria is that market
wide position limit in the stock shall not be less than Rs. 60 crores and
stock’s median quarter-sigma order size over the last six months shall not be
less than Rs. 2 lakhs.
If an existing security fails to meet the eligibility criteria for three
months consecutively, then no fresh month contract shall be 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
Further, the members may also refer to circular no. NSCC/F&O/C&S/365 dated
August 26, 2004, issued by NSCCL regarding Market Wide Position Limit, wherein
it is clarified that a stock which has remained subject to a ban on new position
for a significant part of the month consistently for three months, shall be
phased out from trading in the F&O segment.
Further, once the stock is excluded from the F&O list, it shall not be
considered for re-inclusion for a period of one year.
3. Re-introduction of excluded stocks
A stock which is excluded from derivatives trading may become eligible once
again. In such instances, the stock is required to fulfill the eligibility
criteria for three consecutive months to be re-introduced for derivatives
4. Eligibility criteria of Indices
Futures & Options contracts on an index can be introduced only if 80% of the
index constituents are individually eligible for derivatives trading. However,
no single ineligible stock in the index shall have a weightage of more than 5%
in the index. The index on which futures and options contracts are permitted
shall be required to comply with the eligibility criteria on a continuous basis.
SEBI has subsequently modified the above criteria, vide its clarification
issued to the Exchange “The Exchange may consider introducing derivative
contracts on an index if the stocks contributing to 80% weightage of the index
are individually eligible for derivative trading. However, no single ineligible
stocks in the index shall have a weightage of more than 5% in the index.
The above criteria is applied every month, if the index fails to meet the
eligibility criteria for three months consecutively, then no fresh month
contract shall be issued on that index, However, the existing unexpired contacts
shall be permitted to trade till expiry and new strikes may also be introduced
in the existing contracts.
The following procedure is adopted for calculating the Quarter Sigma Order Size :
The applicable VAR (Value at Risk) is calculated for each security based on
the J.R. Varma Committee guidelines. (The formula suggested by J. R. Varma for
computation of VAR for margin calculation is statistically known as
‘Exponentially weighted moving average (EWMA)’ method. In comparison to the
traditional method, EWMA has the advantage of giving more weight to the recent
price movements and less weight to the historical price movements.)
Such computed VAR is a value (like 0.03), which is also called standard
deviation or Sigma. (The meaning of this figure is that the security has the
probability to move 3% to the lower side or 3% to the upper side on the next
trading day from the current closing price of the security).
Such arrived at standard deviation (one sigma), is multiplied by 0.25 to
arrive at the quarter sigma.
(For example, if one sigma is 0.09, then quarter sigma is 0.09 * 0.25 = 0.0225)
From the order snapshots (taken four times a day from NSE’s Capital Market
Segment order book) the average of best buy price and best sell price is
computed which is called the average price.
The quarter sigma is then multiplied with the average price to arrive at
quarter sigma price. The following example explains the same :
|Best Buy (in Rs.)
|Best Sell (in Rs.)
|Quarter sigma price (Rs.) (Average Price *Quarter sigma)
Based on the order snapshot, the value of the order (order size in Rs.),
which will move the price of the security by quarter sigma price in buy and sell
side is computed. The value of such order size is called Quarter Sigma order
size. (Based on the above example, it will be required to compute the value of
the order (Rs.) to move the stock price to Rs. 306.00 in the buy side and Rs.
307.40 on the sell side. That is Buy side = average price – quarter sigma price
and Sell side = average price + quarter sigma price). Such an exercise is
carried out for four order snapshots per day for all stocks for the previous six
From the above determined quarter sigma order size (Rs.) for each order book
snap shot for each security, the median of the order sizes (Rs.) for buy side
and sell side separately, are computed for all the order snapshots taken
together for the last six months.
The average of the median order sizes for buy and sell side are taken as the
median quarter sigma order size for the security.
Futures & Options contracts may be introduced on new securities which meet the
above mentioned eligibility criteria, subject to approval by SEBI.
New securities being introduced in the F&O segment are based on the eligibility
criteria which take into consideration average daily market capitalization,
average daily traded value, the market wide position limit in the security, the
quarter sigma values and as approved by SEBI. The average daily market
capitalisation and the average daily traded value would be computed on the 15th
of each month, on a rolling basis, to arrive at the list of top 500 securities.
Similarly, the quarter sigma order size in a stock would also be calculated on
the 15th of each month, on a rolling basis, considering the order book snapshots
of securities in the previous six months and the market wide position limit
(number of shares) shall be valued taking the closing prices of stocks in the
underlying cash market on the date of expiry of contract in the month.
The number of eligible securities may vary from month to month depending upon
the changes in quarter sigma order sizes, average daily market capitalisation &
average daily traded value calculated every month on a rolling basis for the
past six months and the market wide position limit in that security.
Mini derivative contracts (Futures and options) shall be made available for
trading on such indices/securities as specified by SEBI from time to time.
Vide its circular no. SEBI/DNPD/Cir-34/2008 dated January 11, 2008 SEBI has
specifically permitted introduction of option contracts with longer tenure on
S&P CNX Nifty index.