Strategy when new F&O stocks are announced

15 stocks are going to be added into F&O on NSE from tomorrow. There were 14 stocks that were added in Sep and 31 in May. 28 of the 31 that entered the F&O in May gained as much as 3%-30% before the D-day. In the case of 14 stocks that added in Sep, 13 of them saw gains from 4%-40%. The similar thing is happening with the 15 new inclusions now. Stocks like Ispat, WWIL and Redington are on a different zone of their own. The reason why the stock prices go up is because of the positive impact due to increased liquidity, increased participation of institutions and removal of circuit filters on these stocks. The strategy institutions use in this case is i) Buy in cash before inclusion in F&O, usually, over a period ii) On the D-day, Short the stock futures thus locking in the arbitrage (The futures will be at a premium due to increased buying activity).

To explain further, lets say the average cost of acquiring in spot market is Rs 100. On D-day, lets say the spot price is Rs 103 and that in futures market is Rs 104. If you just sell the stock, you just get Rs 3. Instead if you sell the future, you lock in Rs 4. Once the profit is locked in, irrespective of price movement, the profit remains.

As more people understand this strategy, more people jump in to take advantage of such opportunity and thats why we see the stock prices going up at such rapid pace when any announcement of inclusion into F&O is made.