In Futures and Options, the role of a lot size is very significant. If you are willing to get a clear knowledge of Futures and Options, lot size is the fundamental theory you need to understand.
In this comprehensive blog, we will let you about 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. The SEBI (Security and Exchange Board of India) decides the lot size of stocks and indices that are traded on both NSE as well as BSE.
Nifty Futures have a lot size of 50 which means if you are willing to buy Nifty Futures, you have to trade in the multiple of 50, as the lot size of Nifty futures is 50.
In the same way, the equity futures also have a dedicated lot size.
For example, Infosys Futures has a lot size of 300. If you are wishing to buy a lot of Infosys Futures that are currently trading at Rs 1632, that means the value of the contract is 300*1632 = 4,89,600.
How a Lot Size is Decided?
SEBI decides the lot size of each company that is associated with the stock trading. When Futures and Options trading came into existence, it was the regulatory body that had decided the theoretical value of Rs 2,00,000.
After deciding the theoretical value, SEBI finalizes a lot size to a definite number that would value more than 2 Lakh when multiplied by the market value. This whole process is done to save the losses of small investors who are willing to trade in 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 inclusion was initiated 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.
The reason behind the modification of a Lot size?
When SEBI observes any major changes in the value of shares that would make a remarkable difference with the lot values, the regulator changes the lot sizes.
Let’s understand with an example: If a company has a lot size of 300. The F&O trading price is Rs 500, hence the lot value is Rs 1,50,000.
If the trading price of that share rises up to Rs 1000. As per the fixed lot size, the total value of the lot will become Rs 3 Lakh which will be a big difference from the decided lot value.
In this case, the SEBI may take an action to revise the lot size to a downward price which would be a better reflection of the lot value.
In a reverse case, the lot size has been revised upward so that it is more compatible with the indicative value.
Purpose of Lot Size
The essential reason to trade F&O in lots is standardization. The standardization can be done in several ways. F&Os across indices come with 1 month, 2 months, and 3 months tenure.
Where to find the lot size in Options Trading?
To find the lot size for options trading, you need to go to the option strategy builder page on the intradayscreener website and select the stock in which you want to trade. Then select the required strike price, there you can see the quantity which is nothing but a “lot size” of the stock.