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Fourteen stocks have been added to the futures and options (F&O) segment in the past week as investor interest in stocks of the mid-cap and small-cap segment picked up pace. Ceat, Oil India, Dewan Housing Finance, Bajaj Finance, Page Industries and Pidilite Industries are among the recent inclusions in the derivatives segment, show notices on the exchanges.
Typically a stock, the value of its trades and activity patterns are monitored for about six months before getting added to the F&O list. Market participants said the rising activity and demand for stocks in the two segments had led to an increase in trades in such stocks.
“In the last rally, CEAT, Dewan Housing Finance and Oil India, despite being good stocks, could not find their way into the F&O segment because of low activity in them. This time, investors are showing an interest in these stocks and others in the mid and small-cap categories, which has allowed them to gain entry,” said Dharmesh Kant, fund manager at IndiaNivesh Securities.
When a stock moves into the F&O segment, it can help investors create short or long positions and initiate a hedging mechanism. "Through such bullish and bearish views, a realistic price of the stock can be found, as even those who do not own the stock in the cash segment can take positional calls on it,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.
By exchange rules, for a stock to be eligible, the median-quarter sigma order size, defined as the value-size an order needs to achieve to cause a change in the stock price, should not be less than Rs 1 million over the past six months. Further, the market-wide position limit for the stock should be at least Rs 300 crore. Also, the stock has to necessarily be a part of the top 500 in terms of the average daily market capitalisation.
Data from WFE showed the National Stock Exchange of India (NSE) is the largest in terms of volume, with about 67 million stock futures contracts traded in the first four months of the year. This was second only to the Moscow Stock Exchange, which saw 75 mn contracts traded till April. At $345,689, NSE clocked the second highest notional turnover in the stock futures segment, after the ICE Futures Europe Exchange, which saw a notional turnover of $818,251.
Experts said the currency arbitrage available in the stock futures segment adds to its popularity in India. Hedge funds are among the largest entities in this segment, they said. “These funds are able to buy in the cash segment and sell in the futures segment. The price differential helps them create a currency arbitrage, missing in places like the US, where the stock price is also in dollars. This arbitrage is largely exploited by the hedge funds in India,” said Kant.
