Mahanagar Telephone Nigam Ltd’s (MTNL) shares plunged 15% on Thursday, which happened to be the last trading session before they were excluded from the list of stocks eligible for futures and options trading. In all probability, this was because leveraged long positions were forced to unwind, since the option of carrying forward these positions to the next settlement cycle no longer existed. Taking this argument forward, it seems reasonable to assume that stocks that are eligible for futures and options trading can enjoy higher valuations, simply because investors can use leverage to build large positions.

However, empirical evidence doesn’t seem to bear this out. Apart from MTNL, 50 other stocks were excluded from the list—no other stock reacted in a similar manner.

Also, the news of this exclusion became public on 24 July. In the two-month period since then, 28 stocks remained flat or gained in value; while the remaining declined. MTNL shares, interestingly, have ended up gaining by 28% in the two-month period, even after accounting for the 15% drop on Thursday. This was on the back of news that the telecom company could sell some of its real estate assets. Clearly, leverage alone doesn’t drive stock values. The fact that the returns of the 51 stocks have differed during the period also shows that fundamental news flow impacts prices to a much larger extent.

Having said that, with futures and options trading, stocks are susceptible to large price swings, especially during the expiry date, as was evident with MTNL shares on Thursday. According to derivatives dealers, there wasn’t enough demand for MTNL shares when arbitrageurs started unwinding positions in the market. In most other cases, value buyers emerged to offset the selling pressure related to the expiry date.