What is a Lot Size in Options Trading
The lot size plays a significant role in Futures and Options trading. If you need to get a clear understanding of Futures and Options, lot size is the primary concept you need to go through.
In this blog, we will figure out what a lot size is and how different derivative contracts have different lot sizes.
What is a Lot Size?
A lot size refers to a fixed quantity of shares one can buy or sell as per the contracts.
If you have been into trading for more than 6 months or more, you may have heard that a company has x number of lot sizes. This simply means that the company has fixed its shares a lot.
The Security and Exchange Board of India decides the lot size of stocks and indices that are traded on NSE and BSE. For instance, Nifty Future has a lot size of 50 which means if someone wants to buy Nifty Futures, he wants to trade in the multiple of 50 as the lot size of Nifty is 50.
Like Nifty Futures, equity futures also have a lot of sizes. For example, Reliance Futures has a lot size of 250. If someone buys a lot of Reliance Futures which are currently trading at Rs 5500, that means the value of Reliance Futures is 250*5500=1,375,000
How are Futures and Options’ Lot Size Decided?
SEBI is the apex body that decides the lot size of each company that is involved in stock trading. When Futures and Options trading came into existence, it was the regulatory body that had decided the notional value of Rs 2,000,00.
After deciding the notional value, SEBI fixes lot size to a certain number that would value more than 2 Lakh when multiplied by the market value. It was done to save the losses of small investors who try Futures and Options.
When SEBI noticed that more lots were purchased by the retail investors, it revised the lot value to Rs 5 Lakh. New additions were introduced after F&O, which kept the lot value to Rs 7.5 Lakh.
Also, the proposal came in front of SEBI to change the value of lot size to Rs 10 Lakh so that only risk-bearing investors can trade in the F&O.
Why are Lot Sizes Modified?
When SEBI notices any major changes in the value of shares that would make significant divergence with the lot values, the regulator revises the lot sizes.
Let’s understand with an example: XYZ company has a lot size of 1500. The F&O trading price is Rs 555, hence the lot value is Rs 8,32,500.
Suppose the trading price of a share rises up to Rs 1000. As per the fixed lot size, the total value of the lot will become Rs 15 lakh which will be a big divergence from the decided lot value.
By seeing the case, the stock market regulator may take action to revise the lot size to a downward price which would be a better reflection of the lot value.
The reverse case also happens. In these types of cases, the lot size has been revised upward so that it is more compatible with the indicative value.
Purpose of Lot Size in Options Trading
The primary reason to trade in lots in F&O is standardization. The standardization can be done in several ways. Futures and Options across indices come with 1 month, 2 months, and 3 months tenure.