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Understand Why Different Equity Derivatives have Different Lot Sizes

06 Apr 2022 0 COMMENT

Introduction

When it comes to derivatives, futures and options are among the standardised contracts traded on exchanges. Some aspects of these derivative contracts make them tradeable on exchanges. One factor is the derivative lot size. 

What is Lot Size?

A lot size is the minimum quantity of the derivative's underlying asset that you can purchase. It can be thought of as quantity per single unit of a contract. Derivative lot sizes are most often applicable to stock and index derivatives. The futures lot size or options lot size influences the futures' and options' (F&O) tradability. 

Suppose the NSE F&O lot size for a stock is 1000 shares. Then the minimum you can put in a trade for is 1000 shares. All contracts after that also have to be in multiples of 1000. You cannot buy 750 shares or 1500 shares. It is the concept of derivative lot sizes. At present, the lot size for Nifty is 50 and for Bank Nifty it is 25 which are the most traded underlying's. 

Why Do Equity Derivatives Lot Sizes Differ?

The Securities and Exchange Board of India monitors and regulates derivatives markets in India. When SEBI introduced futures contracts in the country, it fixed the lot size for futures contracts at a minimum indicative value of Rs. 2,00,000. SEBI did this to deter retail investors from investing too aggressively in F&O contracts. SEBI's primary worry was that retail investors would not be well-informed about derivative products and run into losses. 

In 2015, SEBI hiked the indicative lot size to Rs. 5,00,000 to further deter retail investors in the market. Market participants also talk to include new additions to the F&O list where the F&O lot size will have a minimum indicative value of Rs. 7,50,000 or even Rs. 10,00,000.

Additional Read: How to Manage Risk while Trading in Derivatives?

When understanding why derivative lot sizes differ, you need to understand how lot sizes are calculated. The lot size is fixed such that when the current market price is multiplied by a certain number of shares, the notional value exceeds the minimum threshold amount as set by SEBI, be it Rs. 2,00,000, Rs. 5,00,000 or Rs. 7,50,000. When the stock price fluctuates, its lot size will also be altered accordingly. For instance, a stock costing Rs. 200 will need to have a minimum of 1000 shares in its lot size to meet the lot value. Now, if the price of the shares reduces to Rs. 150, its lot size will have to be at least 1,334 to meet the SEBI lot size requirement. 

SEBI revises the lot sizes of different F&O equities instruments from time to time based on their stock price movements to keep in line with its requirements. That is why different equities derivative lot sizes differ.

Additional Read: What are Swaps in Derivatives & its Types?

Conclusion

As you can see, the F&O lot sizes for different futures and options contracts changes depending on SEBI's requirement and the individual stock or index's prices. That you do to keep F&O trading in check so that you don't run into high losses. However, let us assume you are a retail investor with an appetite for such high-value contracts. You can then trade in derivatives by opening a Trading and Demat Account with a registered stockbroker. Get started now! 

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