The Hindu Business Line : Using Futures/Options

This has reference to your article `Using Future/Options' in Business Line on Sunday 13. The reference given in the article talks about the position (which is at the end of day session) of stock in which there is a restriction in place. I want to know whether buying and selling of future (square off) carried out in the some session (day) will attract penalty? — H. S. Gandhi

The circular makes two points. During the ban period, client/trading members shall trade only to decrease their positions through offsetting positions.

Second, if positions increase at the end of the day, then penalty will be levied on the value of the position at the end of the day.

Technically, therefore, it is possible to trade intra-day and get away without any penalty. Why, however, would anyone want to venture intra-day in that stock?

It may be extremely difficult to square off positions before the end of the day except at a sizeable loss.

In the case of Arvind Mills, can you please tell me when the ban will be lifted? What will be the effect of the ban on the stock price? — Geetha

According to the circular, the ban will be lifted only when the open outstanding position comes down to 80 per cent or below of the market-wide position limit.

As regards impact on stock price, it depends on what kind of positions traders have in the spot and in the derivatives market as well as the profits of those positions.

If they had a long position in the spot market and had taken a short position in futures, which they are unable to square off, then other traders may jack up the price of the stock in the spot market.

In contrast, if traders had taken long positions in the futures market, they would want to borrow and hedge their position in the spot market if their positions were already running a loss. These restrictions on trading could lead to abnormal price movements in the spot market.

In the case of Arvind Mills, however, such unusual movements were absent.

The stock price languished, as did the market during the period. Trading volumes in the spot market were also not extraordinarily large.

Open positions in the derivatives segment were wound down without any undue volatility in prices.

Queries relating to futures/options may be sent to

fno@thehindu.co.in

or to Futures & Options, Kasturi & Sons, 859-860, Anna Salai, Chennai 600 002.

Suresh Krishnamurthy

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