One unique feature of exchange-traded futures is they’re standardized. The way most companies do this is by using minimum lot sizes. The lot size for futures is the lowest ticket size of shares you can trade (futures).
When trading options and futures, you may only sell or buy those products in a minimum of one lot or the multiples of that lot size. For instance, you have a lot size of 75 units for Nifty, so you must trade it in multiples of 75. Likewise, Reliable features a lot size of 250 shares, so you must trade those futures and options using multiples of 250.
The lot size for futures and options is the same. When you speak of futures/options lot size, the product and price are the notional value for the futures contract. Let’s break things down into different components to help you understand the concept.
What Are Lot Size Futures and Options?
The key to understanding futures and options (F&O) trading is to focus on the concept of lot sizes. This is one method used to standardize trading in this market. You should be aware of the difference between forwards and futures. The latter is standardized, but the former includes OTC (over-the-counter) products.
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Why Is Lot Size Necessary in Futures and Options Trading?
One way to standardize futures is by using lot sizes, giving them a secondary market. For instance, someone wishes to sell you an odd number of futures shares, but there are no buyers, which presents a problem. This is addressed by utilizing standard lot sizes.
Any Futurees and Options forex trading platform you use will feature standardized lot sizes. SEBI primarily defines the lot sizes for all stocks and indices traded in futures and options. It constantly updates the list.
How Are Lot Sizes Fixed (Futures and Options)?
You must understand its history to understand the concept. SEBI had originally fixed the lot size value for an index or stock as Rs.2 lakh. You must remember that they are notional values and not the actual margins payable.
The margin on futures is a fraction of the notional value. Likewise, the lot size gets fixed at a relevant number of shares. When multiplied by the current market prices, that would provide a notional value of over Rs.2 lakh. That was the practice until 2015.
In 2015, SEBI chose to update check speculation for retail investors of options and futures because most of them didn’t understand the full risks involved. SEBI then modified the indicative lot size to over Rs.5 lakh and included more provisions in the F&O list to have notional values between Rs.7 lakh and Rs.10 lakh.
Today, the lot size values often vary, but they have an average of Rs.7 lakh and Rs.10 lakh. SEBI only initiates a review to modify lot sizes and bring them to normalized levels when the lot value diverges significantly from that range.
Why Are Lot Sizes Modified in the Futures and Options Market?
As you see, there’s an indicative value range maintained for the lot sizes. While they’re pegged on the indicative lot values at one point in time, those notional values per lot will change if the stock sharply moves up or down.
For example, you have a stock with a lot size of 1,000 shares at a price of Rs.600. This has a notional value of Rs.6 lakhs/lot. If the stock rises to Rs.1,500, its lot value will change to Rs.15 lakhs, making it hard for many traders to pay margins. This affects liquidity. Therefore, the SEBI decides to reduce the lot size to about 50 to bring the lot value to a palatable level of Rs.7.50 lakhs. It’s an ongoing process here.
Reverse logic also applies for stock price corrections. SEBI revises lot sizes higher to make them more compatible with indicative lot values. Those revisions are done routinely.
The point to understand here is that indicative lot values have fixed individual lot sizes and must be continuously modified and reviewed based on market movements of the index or stock. That’s why lot sizes differ, and they get modified with time.
For example, Bank Nifty has a unit price of 35,003 and a lot size of 25 shares, but Asian Paints has a price of Rs3,018 with a lot size of 300 shares. The notional value of both is nearly equal, which is the basis for trading futures and options.
Lot sizes define the minimum purchasing quantity for futures and options contracts. Traders may buy them based on the lot size or multiples of it. Now that you know this, it might be easier to trade F&O.
How Much Is a Lot in Futures?
The lot represents how many contracts are contained in one security, so it changes periodically, depending on the lot size of the future or option.
How Do I Find My Futures Lot Size?
You calculate the notional value of your futures contract by multiplying the price per unit by the contract size.
What Is the Minimum Lot Size Futures?
The lot size for stock derivatives is always fixed as a multiple of 25.