There would be some downward pressure on price in the short term, as traders rush to square off positions.
Things got worse for Kingfisher Airlines' investors. If the year-to-date fall of the share price from Rs 66 to Rs 24.55 wasn't enough, the stock is going to be out of the futures and options (F&O) segment from January.
While genuine investors, who own the stock, will not get directly impacted, there will be some volatility seen as January approaches. The direct impact would be that there could be some more price fall, as traders rush to square off positions.
More important, when a stock is taken out of the F&O segment by exchanges, it is a clear indication that it has suffered serious loss in market capitalisation and there are liquidity issues as well. Both are not good indicators for investors holding the stock.
According to Siddharth Bhamre, head of derivatives trading at Angel Broking, "The most important criteria for stocks to be included in the F&O segment are market capitalisation and liquidity. Typically, in bear markets, when the stock prices start falling, the market caps take a beating and, consequently, stocks are excluded from the space." In April 2009 when the Sensex was floundering at 11,000-levels, the National Stock Exchange took 50 stocks off its F&O list.
What's more, once off the list, they would not be re-introduced in the segment for at least a year. After which, the stock would have to fulfill criteria laid down by the exchange for three consecutive months to be reconsidered.
Investors who dabble in the F&O market may not feel comfortable, as there would be some uncertainty on price movement. "Your choice will depend on what call you have on these stocks. If you think that the share price is likely to fall further, then it is better to square-off your position as soon as possible," says Alex Mathew, head of research at Geojit BNP Paribas Financial Services.
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Besides, if you wait till the January expiry, you may be caught off-guard if there are a lot of investors squaring off positions, sending prices tumbling. A mass squaring off on positions or contract settlements could lead to prices being driven down.
Other stocks taken off the F&O segment are Gitanjali Gems, Great Offshore, KS Oils and Jindal South West. "For these stocks, most traders have exposure to futures contracts rather than options. The latter are quite illiquid," says Prasanth Prabhakaran, president— retail broking, IIFL. Options contracts are usually held in frontline stocks and not actively traded. Those holding futures contracts can follow these strategies.
| CRASHING OUT Shown the door: Majority of stocks see a fall in prices after exclusion from the F&O list; but there could be exceptions | |||||
| Stock/Date of F&O exit announcement | Stock price on date of announcement (Rs) | Stock price on last expiry date (Rs) | Fall/rise (%)* | As on Nov 23 (Rs) | Fall/rise (%)** |
| Orbit Corporation (May 18) | 46.9 | 37.6 (July) | -24.73 | 26.4 | -77.65 |
| Reliance Media Works (May 18) | 134.05 | 117.3 (July) | -14.28 | 83.05 | -61.41 |
| GTL Infrastructure (June 24) | 16.05 | 12.86 (Aug) | -24.81 | 8.5 | -88.82 |
| GTL Limited (July 22) | 74.25 | 57.8 (Sept) | -28.46 | 37 | -100.68 |
| Moser Baer (Aug 18) | 21.35 | 27.6 (Oct) | 22.64 | 20.65 | -3.39 |
| * From date of announcement to expiry ** From date of announcement to as-on-date | |||||
BUY PARTICIPANTS: If you have bought a futures contract, then you presumably have a long-term view on the stock's performance. In this case, if you have the funds, Sudip Bandopadhyay, MD & CEO, Destimoney Securities, suggests investors can square off the position in the futures market and take delivery of the equivalent quantity in the cash market.
SELL PARTICIPANTS: If you have sold a futures contract and hold an equivalent quantity of shares in the cash segment, you are well hedged. Assume you hold 10 shares of Rs 100 each and have sold the same amount of shares in the futures market. If the prices of the shares move up, then you will make profits in the cash segment but a commensurate loss in the futures segment. The opposite will happen if the share prices fall. Therefore, to exit your sell position without any losses, you can sell off the shares in the cash segment and square off your futures position.
