Until now, trading illiquid F&O contracts had an execution risk that if you placed a market order it could get executed at any price which could cause significant damage as an impact cost. To ensure orderly trading NSE (National Stock Exchange) has now defined an execution range for every contract as explained in the circulars below.
As the comment within your question suggests, your risk has reduced by a huge margin because of this move by the NSE. Let me tell you a story…
I was a very keen options trader simply because options gave me a lot of options. So I was trading some Nifty options quite a while ago and was feeling like the market will move in my direction. I wanted to bet big so I put in all my money on calls. Since the market was moving very fast I didn’t have time to place a limit order and wait for it to get executed, so I placed a market order. I wanted to buy 10000 quantity of 5200 Calls and the price that was quoting on my system was 80 so all I needed was 8 lakhs and I had around 9 lakhs in my account. I would get out of my position after having made 10 or 20 points.
Placed a market order, which was executed almost immediately. To my shock and horror I saw that my average buy price was Rs. 110!!! I was already down by 3 lakhs as soon as I entered the position. After some time I got a call from my broker saying that my account was in a debit of Rs. 2 lakhs. I was, like, “What the…??? How could this happen? Why did this happen? You’re cheating me! I’ll report this to the cops!” Even the broker was not really aware of what happened, but he was clear that I entered the position on my own so it was my risk. I told the broker, “How could your software allow me to take a position for more money than I had in my account?” The broker said “The system allows you to take a position as long as you have the funds for the first lot on sale multiplied by the quantity.” So since the price quoting was 80 and I had more than 8 lakhs in my account, the order was accepted. We haggled for a long time but at the end of it I had to pay the additional impact cost of a market order.
This new rule by the NSE makes sure that none of you have to ever go through the horror I went through. If the LTP of an option was around Rs. 80, there’s no way your average buy price will be 110 even if there isn’t enough liquidity in the scrip. At best, you’ll get a decent price. At worst, your order gets cancelled by the exchange. I still love options, but I trade them with much more caution now.
Price Execution Range applies to Mid and Far Month Contracts.
An option is trading at 150 , reference price is 150 so the execution price range is 10% (15) or minimum absolute range is 20 points. Price range will be 130 - 170.
If the option is trading at 300 , reference price is 300 so the execution price range is 10% (30) or minimum absolute range is 20 points. Price range will be 270 - 330.
I am taking a hypothetical situation where there is no Bid and Ask for option at 150RS.
Scenario 1 :
A places a buy order at 125 which is out of the price range, but still the order will be in book as the lower circuit will be 100-105. which will show you in the book, now B places a sell order at 129 which is out of the price range and the order will get rejected. and vice versa
Scenario 2 :
A places buy order at 131 which is in the execution price range, B places a sell order at 129 the order will get executed as the Bid is under price execution range and vice versa.
Thanks Hanan. Can you please explain the difference between % of reference price and execution range/Min Absolute Range with the help of an example? The circular is a bit confusing. Also, would appreciate an article on Z Connect regarding this. Thank you.
In your first scenario, shouldn’t the order get executed at market price of 150 itself since the person places a sell limit order of 129 which is below the Market Price. Also, why is the lower circuit 100-105? What percentage is that?
Also, as per your scenarios, am i correct in understanding that NSE considers the higher of the two between the execution price range and minimum absolute range?
I have a scenario, i’d appreciate if you could help me understand this well:
Lets say i’m holding a 7200 CE May Option which is trading around 150, so assuming i want to sell it when the market opens on Monday. Under no circumstances, can i get filled BELOW 130 if the M.P of said call option is trading at 150 right?
And this is done to protect the interests of the traders from outrageous fills leading to disastrous trades?