F&O Stock Selection Criteria (SEBI)
SEBI prescribes quantitative eligibility criteria — including median quarter-sigma order size, market-wide position limits, and impact cost thresholds — that a stock must satisfy before NSE can introduce or continue futures and options contracts on it.
Not every listed stock qualifies for derivatives trading in India. SEBI has published a framework, revised multiple times since the introduction of single-stock futures in 2001, that sets minimum liquidity and market-depth standards. The framework exists to ensure that F&O contracts can function without excessive manipulation risk and that hedgers can enter and exit positions without moving the underlying price significantly.
The primary quantitative criterion is the median quarter-sigma order size — the order size required to move the stock price by 0.25% (one quarter of one standard deviation). SEBI mandates that this metric, measured as a rolling median over the preceding six months, must exceed a specified rupee threshold (periodically revised upward; the 2023 threshold was set at Rs 25 lakh). A higher quarter-sigma order size indicates a deeper, more liquid order book that can absorb large derivative-related hedging flows.
Impact cost is the second criterion. It measures the average percentage deviation from the ideal price when executing a notional order of a fixed size (historically Rs 5 lakh but revised upward). A stock with impact cost below 1% on a sustained basis qualifies. This is effectively a transaction cost filter — stocks with high impact cost are unsuitable for futures and options because hedging through them is expensive.
The market-wide position limit (MWPL) is the aggregate open interest ceiling across all clients for a single stock. MWPL is set at 20% of the non-promoter free-float shares. When total market-wide OI crosses 95% of MWPL, the stock enters a ban period: no new positions can be opened, only existing positions can be closed. Breaching 100% triggers additional penalties. The MWPL system prevents derivative positions from crowding out the available float of a stock.
Stocks that fail to meet these criteria for three consecutive months are placed on the exit criteria list and scheduled for delisting from the F&O segment. This happened to a number of mid-cap stocks during the illiquid phase of 2019-2020. Conversely, new additions to the F&O list are made based on SEBI and exchange joint review, and they often coincide with periods of high retail interest in a sector.