What is F&O execution range and why do some open orders outside F&O execution range get cancelled?
Execution range is a price range within the circuit limits (operating range), on both sides of a 'reference price' of the contract only within which orders will get executed.
The reference price will be computed as follows:
- For a new contract - At market open, Theoretical price derived from the underlying price (using implied volatility in case of options contracts and rate of interest which shall be revised daily with the applicable MIBOR rate) or base price of the contract in case the underlying price is not available at the time of computation.
- The base price of the contracts on subsequent trading days - At market open, shall be the daily close price.
- During Trading Hours – 1 minute simple average of trade prices, on a rolling basis, 1 minute simple average of trade prices, the reference price shall be revised throughout the day on a rolling basis at 1-minute intervals
- On days when the contracts were not traded in the last half an hour or not traded at all during the day, the base price for the next day shall be the theoretical price
So the execution range on both sides of the reference price would be :
|Segment||Reference Price||% of Reference Price ||Minimum absolute Range (Rs.)|
|Options||Rs 0.05 - 50||-||20|
|> Rs 50||40 %||-|
To understand this better, assume -
Bank Nifty spot is at 20500. Banknifty 20300 CE trading at 200 on expiry day and you bought it at this price.
Let’s take the circuit limits of this option at 0.05 (Lower circuit limit) and 400 (Upper circuit limit).
Any order placed between the circuit limits is a valid order and will be stamped by the exchange. The circuit limits for options is calculated based on its Delta value. This circuit limit is a dynamic price band.
But there is a possibility of order cancellation in the scenario explained below:
For Bank Nifty 20300 CE, if the reference price is 200, then the executable range is 120 to 280. Assume you have 2 lots (40 qty) and you have placed a stop loss for this at 100. This is a valid order and will be open.
Another buyer has also placed a Buy Limit order for 2 lots at 100 and this exactly matches with your 2 lots stop-loss order in the market depth. This is also a valid order and will be open as it is within the circuit limits of the contract.
If Bank Nifty spot falls 90 points in 1 minute, Banknifty 20300 CE will fall to 110. When this happens, the reference point at the end of this minute will change. Say the reference point is now 180 and the execution range has changed to a new range of 108 to 252. Your stop loss of 100 is still outside the execution range but is still open. If Bank Nifty spot falls another 20 points within the next trading minute. Banknifty 20300 CE will further fall to 90.
Here, your stop loss of 100 has reached but it is still out of the execution range as the new reference point is yet to be formed only at the end of this minute. It is only after the new reference point is formed that your order will fall within the execution range.
Since your stop loss of 100 has now been reached and there is a matching Buy limit order at 100, and it is still outside the execution range as the new reference point is yet to be formed, this order will be canceled in such a scenario.
When there is a significant move in an F&O contract, and if the execution range is not updated immediately by the exchange(as it is calculated based on the average of the trades in the contract), your order could get rejected.