SEBI’s F&O Ban Rules Put Delta-Based Trading Restrictions Under the Spotlight

SEBI’s revised framework for stocks entering the futures and options ban period has brought a new issue into focus: a trader trying to reduce risk may, in some circumstances, still end up breaching the rules. 

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The concern stems from the shift towards delta-based, or Future Equivalent (FutEq), exposure for measuring positions during an F&O ban. While the approach is designed to measure market-wide exposure more precisely, the Moneycontrol analysis argues that its application to individual portfolios can create complications for traders using hedged or multi-leg strategies. 

The issue becomes particularly relevant when a volatile stock enters the ban period and traders need to adjust existing positions quickly. 

How does a stock enter the F&O ban period? 

Every stock available in the derivatives segment has a Market Wide Position Limit (MWPL), which caps the total futures and options exposure that market participants can collectively hold in that stock. 

Under SEBI’s May 29, 2025 circular, MWPL is calculated as the lower of 15% of a stock’s free float or 65 times its average daily delivery value, subject to a floor of 10% of free float. The limits are recalculated every quarter. 

A stock enters the F&O ban period when market-wide open interest exceeds 95% of its MWPL. Normal derivatives trading resumes after open interest falls to 80%. 

The cash market remains unaffected by the F&O ban. 

A violation attracts a penalty equivalent to 1% of the value of the excess quantity at the closing price, subject to a minimum of ₹5,000 and a maximum of ₹1 lakh for each entity, stock and day. Brokers additionally levy 18% GST. 

What changed under the delta-based framework? 

From December 2025, the framework moved from measuring contracts to measuring Future Equivalent open interest. 

Under this system, futures and options positions are converted into their delta equivalents. A futures contract carries a delta of 1, while an at-the-money option typically has a delta of around 0.5. A deeply out-of-the-money option has a delta closer to zero. 

The 95% threshold for entering the ban and the 80% threshold for exiting it are now measured using this delta-adjusted exposure. 

When a stock enters the ban, each entity’s existing position becomes its base position. On subsequent days, both the base position and end-of-day position are assessed using contract deltas published by the clearing corporation at 2 pm. 

A position does not violate the rule when its end-of-day FutEq remains at or below its base FutEq without changing sign. 

This means fresh trades are not automatically prohibited during the ban. They can be permitted as long as the resulting exposure meets the delta test. 

Why can hedging become difficult? 

The complication arises with portfolios designed to remain close to delta-neutral. 

Strategies such as straddles, strangles, iron flies and ratio spreads use multiple positions that offset one another. When a trader tries to close only one leg — particularly the position generating losses — the remaining position can push the portfolio’s delta from positive to negative, or vice versa. 

That sign change can constitute a violation under the framework even when the trader’s intention is to reduce the overall risk in the portfolio. 

The Moneycontrol analysis illustrates the problem using a hypothetical position in Kaynes Technology. In one example, buying back a loss-making put would leave the remaining position with negative delta, creating a sign change and therefore a violation. 

At the same time, certain trades that add another options position can remain within the permitted delta range. 

This is the central concern raised by the analysis: compliance under the framework is determined by the resulting FutEq position rather than by whether a particular trade increases or reduces the portfolio’s broader risk. 

The 2 pm delta calculation adds another complication 

Timing can also matter. 

The positions are assessed using deltas published by the clearing corporation at 2 pm. A trader placing a hedge earlier in the session therefore does not necessarily know the exact delta against which the position will ultimately be tested. 

In a volatile stock, the delta can change materially between the time a hedge is placed and the 2 pm calculation. 

The analysis also notes that broker-level practices are not uniform. While exchange rules can permit fresh trades that reduce delta, some brokers do not allow fresh orders in stocks under an F&O ban, while others permit positions intended to reduce or offset exposure. 

As a result, the trades available to a trader can also depend on the broker’s risk-management system. 

Minimum penalty can weigh more heavily on smaller violations 

The ₹5,000 minimum penalty can make relatively small breaches expensive. 

In an example cited in the Moneycontrol analysis, a violation equivalent to 42 shares was valued at around ₹1.42 lakh. A 1% penalty would ordinarily work out to ₹1,423, but the minimum penalty raises the charge to ₹5,000. 

After adding GST, the amount reaches ₹5,900. The penalty can apply again for every day that the position remains in violation while the stock is under the ban. 

F&O rules have undergone several changes 

The delta-based ban framework is one of several changes introduced in India’s derivatives market over the past two years. 

Other measures cited in the report include changes to weekly expiries, larger contract sizes, an additional 2% extreme loss margin on expiry-day short options, removal of the calendar-spread margin benefit on expiry, upfront collection of option premiums, intraday monitoring of position limits and the introduction of the Closing Auction Session. 

The Moneycontrol analysis does not question the purpose of the MWPL framework itself, which is intended to prevent excessive concentration in individual stock derivatives. 

Instead, it raises a narrower issue around implementation: whether a delta-based market-wide exposure measure can adequately distinguish between a trader adding risk and one attempting to reduce an existing position. 

Under the current framework, the answer can depend on how the trade changes the portfolio’s Future Equivalent exposure even when the transaction itself is intended as a hedge.