Understanding Derivatives: Exploration of Trade Restrictions and Swap Techniques

In the financial world, trading bans on certain underlying assets can significantly affect strategies employed by traders. Here's a breakdown of how a trading ban works in the context of Futures and Options (F&O) trading on the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE), as well as the implications of a recent revision in the rules.

When the total open interest on futures and options positions of a particular underlying reaches 95% of its market-wide position limit (MWPL), a trading ban is imposed. This ban prevents traders from creating new positions or rolling over their existing ones.

This strategy, often used by traders, involves taking positions on futures based on the relative price of near-month, middle-month, and farther-month contracts, a practice known as curve positioning trades. However, a trading ban constrains rollover strategies, as you cannot rollover when the futures contract you are holding faces a trading ban.

Traders can alter their existing long futures positions to reduce the net delta by attaching a short out-of-the-money call on the same underlying. This move may lead to taking profits on the existing position instead of rolling over.

It's essential to note that this strategy is meaningful only if the trader believes the futures price will remain range-bound. If the decline in the futures price is expected to be greater than the gains from the short call, the strategy may not be advisable. Conversely, if the decline in futures price is less than the gains from the short call, the short call may gather losses if the underlying moves up.

From October 2025, the trading ban will be based on the futures equivalent open interest position, a revised rule that does not change the fact that a trading ban constrains rollover strategies. After the trading ban becomes effective, traders should consider taking profits on their existing position because the inability to create new positions can lead to adverse price movement.

If you're not already holding a long position in a futures contract and are asked if you would initiate one, it may not be meaningful to rollover the position.

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In summary, understanding the implications of trading bans on F&O trading is crucial for any trader. By being aware of these rules and their effects, traders can make informed decisions and adapt their strategies accordingly.