As a result of using notional value of options, the Market Wide Position Limit (MWPL) crosses 95% sooner, which is the threshold for the stock to enter the F&O ban.
Instead of this method, SEBI’s paper recommends futures equivalent or a Delta-based Open Interest calculation. It also recommends a change in the index derivative positive limit and the way in which the Market Wide Position Limit is calculated.
What Is Delta Based OI Calculation?
Currently, the notional value of the option strike price is used to determine the Open Interest. In a Delta-based method, the Delta of the strike will be used to determine the Open Interest.The consultation paper recommends using the Delta of an Out-of-the-Money Call to calculate Open Interest.
Options Delta is a theoretical estimate of how much an option’s value may change in case of the strike price moving in either direction.
SEBI’s consultation paper also alludes to an exercise where it back tested data from July 1, 2024 to September 30, 2024. The study showed that under the current MWPL rules, there were 366 separate instances of stocks entering the F&O ban.
However, as per the proposed new formula, the instances of stocks entering the ban period drop to 27, which is a 90% drop. “This highlights how the new MWPL approach would reduce artificial pushes into the ban period and make such manipulations more difficult,” the SEBI consultation paper said.
