Markets punish stocks expelled from the future and options segment

Stocks that are to be expelled from the future and options (F&O) segment witnessed heavy selling pressure this month. In April, the National Stock Exchange (NSE) issued a list of 34 securities, which included Jet Airways, Jain Irrigation and PC Jeweller, to be removed from derivatives as they failed to meet the criteria laid down by the Securities and Exchange Board of India (Sebi) and exchanges.
 
Barring two, stock prices of all the 34 securities have fallen this month by an average 11 per cent even as the benchmark Nifty has gained marginally. Worst-hit have been the companies with high debt and uncertain business outlook. Shares of Jet Airways, which has grounded operations after running out of cash, had seen its stock price tumble by over 50 per cent since April 23, when the NSE issued the expulsion list. Shares of Jain Irrigation and PC Jeweller, too, have fallen more than 50 per cent in the past two months.
 
Stocks that are part of the derivatives segment don’t have any trading restrictions such as circuit limits and compulsory delivery.  As a result, they are a fertile hunting ground for traders. Experts say F&O expulsion led to the unwinding of speculative bets in these counters, which led to huge gyrations in the stock prices.
 
“Whenever any stock is removed from the F&O segment, liquidity becomes scares in the counter. Typically, any stock that is traded in derivatives sees a lot of activity due to hedging and arbitraging,” says Chandan Taparia, derivative analyst, Motilal Oswal. “The overall weakness in the broader market due to the concerns surrounding crisis at non-banking finance companies (NBFCs) could have added to selling pressure on stock removed from derivatives.”
 

Some believe the slide in the stock prices is only partly on account of F&O expulsion but largely on the back of deteriorating business outlook.
 
“F&O removal can’t be the sole reason for the steep correction. Most of the stocks could have corrected because of negative news flows associated with those companies,” says Sneha Seth, derivative analyst, Angel Broking.
 
The pruning of derivatives list is being done to curb speculative trading.  After the latest expulsion, only around 160 stocks—out of the total listed universe of 1,900—will be available for trading in the derivatives segment. Furthermore, a large number of remaining stocks will have to be physically-settled instead of cash settlement. For physically-settled contracts, the buyer gets the underlying security in their demat account as opposed to a cash transfer in the bank account.