Every day, over 1,000 crores of contracts are traded in India's F&O market, making this lucrative for traders. Choosing the right F&O stocks is crucial for maximising returns and managing risks effectively. This blog is essential reading for anyone serious about intraday trading in the Indian stock market. By understanding the key factors that influence the selection of F&O stocks, traders can make informed decisions that enhance their trading strategies and outcomes. Whether you are a seasoned trader or a beginner, this guide offers valuable insights and practical tips to help you succeed in the fast-paced world of intraday F&O trading.
An F&O stock refers to a stock that is eligible for trading in the Futures and Options (F&O) segment of the stock market. To ensure that only the most suitable stocks are included, exchanges like the National Stock Exchange (NSE) in India have established stringent eligibility criteria. These criteria assess the stock's liquidity, market activity, and stability.
1. Top 500 stocks list:
The selection process begins by identifying the top 500 securities based on the average daily market capitalization and average daily traded value over the past six months. This list is updated on a rolling basis on the 16th of every month.
2. Market-Wide position limit:
To qualify for the F&O segment, a stock must have a market-wide position limit of at least ₹500 crores on a rolling basis. This means the total number of open contracts in the stock, both futures and options, must be at least ₹500 crores in value. This criterion ensures that the stock has enough significance and market depth to support substantial trading activity, reducing the risk of market manipulation. The market-wide position limit is calculated based on the number of shares held by non-promoters, also known as the free-float holding. Specifically, the limit on open positions (in terms of the number of underlying stocks) on futures and options contracts for a particular stock shall be 20% of the free-float holding. The value of the market-wide position limit is determined using the closing prices of the stocks in the underlying cash market on the date of expiry of the contract each month.
3. Quarter sigma order size:
The median quarter-sigma order size, which measures the price impact of a given order size, must exceed ₹25 lakhs over the previous six months. This criterion ensures that the stock can handle large orders without significant price distortion.
4. Average daily deliverable value:
The stock must have an average daily deliverable value of more than ₹10 crores in the cash market over the past six months. This indicates consistent and substantial trading activity.
5. Consistent performance:
Each of the above criteria must be met continuously for six months to ensure that the stock's inclusion in the F&O segment is based on sustained performance and stability.
Choosing the best stocks for intraday trading in the Futures and Options (F&O) segment requires a strategic approach and careful consideration of several key factors.
1. Liquidity
What it means: Liquidity refers to how easily you can buy or sell a stock without affecting its price.
Why it matters: High liquidity ensures that you can enter and exit trades quickly, which is crucial for intraday trading.
What it means: Volatility measures how much a stock's price fluctuates during the day.
Why it matters: High volatility provides more trading opportunities as the stock price moves up and down.
What it means: Market trends indicate the general direction in which the stock market is moving, while news can impact stock prices.
Why it matters: Stocks that are in the news due to earnings reports, mergers, or other significant events tend to be more volatile and liquid.
What it means: Technical analysis involves using historical price data and trading volumes to predict future price movements.
Why it matters: Tools like moving averages, relative strength index (RSI), and Bollinger Bands help identify potential buy and sell signals.
What it means: Different sectors of the economy perform differently at different times.
Why it matters: Understanding which sectors are performing well can help you choose the best stocks within those sectors.
When it comes to selecting F&O stocks, the potential for high returns is matched by significant risks. Leverage can amplify losses just as much as gains, and market sentiment can shift rapidly, leading to unexpected price movements. Options traders must contend with time decay (the reduction in the value of options premium as they approach expiration), which erodes the value of contracts as expiration approaches. The psychological pressure of constant market monitoring can lead to stress and impulsive decisions. Additionally, frequent trading incurs substantial transaction costs, and regulatory changes can impact trading conditions.
Choosing the best F&O stocks for intraday trading involves careful consideration of liquidity, volatility, market trends, and technical analysis. By understanding and applying these criteria, traders can make informed decisions to enhance their trading strategies and manage risks effectively.
For comprehensive insights and detailed guidance on F&O trading, visit the Sharekhan Knowledge Centre.
Delve into the world of futures and options trading with Sharekhan expert guidance. Our comprehensive resources and intuitive platform empower you to make informed decisions and capitalize on market movements.
Embark on your stock trading journey with Sharekhan's comprehensive platform. Learn the fundamentals of equity trading, gain insights into market trends, and access powerful tools to make informed investment decisions.
Safeguard your investments with Sharekhan's secure and reliable Demat account. Our platform offers robust security features to protect your holdings, ensuring your investments are in safe hands. Open Demat account today and enjoy peace of mind while you invest.
Make informed mutual fund investment decisions with Sharekhan's expert guidance. Explore a wide array of funds to match your financial goals and risk tolerance. Start building your wealth today.
Leverage Sharekhan's market knowledge and experience to make informed decisions in the initial public offering (IPO) space. Our research and analysis equip you with the insights you need to identify promising IPOs and participate in their growth potential.
