Why Different Derivative Contracts Have Different Lot Sizes

When talking about derivatives trading, futures and options are the most commonly traded in financial markets. Many factors affect F&O Trading. The concept of Lot Size is about standardization.

The first standardization is that the F & O Trading market expires on the last Thursday of every month. Secondly, you can get the futures and options for the tenure of 1 month to 3 months and so on. The third one is the Lot Size.

SEBI has pre-defined the lot sizes of all the stocks allowed in F&O Trading.

Let us first understand the lot size to know why they differ in size in different derivatives.

What's the Lot size:

A lot size can be the minimum amount of derivatives underlying assets that a trader can purchase. In other words, it can be put as the quantity of a single Contract. Derivative lot sizes are commonly applicable to stock and index derivatives. The lot size of the future and a lot size of options affects the F&O Trading.

Let us see an example:

Suppose the NSE has decided the lot size of stock as 500 shares, then the minimum shares you can trade is 500 or multiples of 500. You cannot put 700 or 1300 such shares for trade. This is the actual concept of derivative lot size. Currently, the lot size of Nifty is 50, and the same for Bank Nifty is 25.

Now, the main question is, why do different derivatives have different lot sizes?

As we all know, the SEBI monitors and regulates the flow derivative market in India, along with any other financial asset. When the SEBI introduced the future contracts, It kept the minimum indicative value at Rs. 2,00,000.

This was done to protect investors' money and avoid ending up in losses while trading with derivative products, as derivatives were newly introduced. People were not completely aware of the product.

In 2015, the price was hiked again to Rs.5,00,000 to make the retail investors change their investing methods. Some also demanded to hike it even more to 10 lakhs, but SEBI has to look from all the directions and cannot just fulfill the wish of some investors.

The question asked above is why derivatives contracts have different lot sizes we also need to learn how lot sizes are calculated. We have already seen the lot size in the above paragraphs; let us now study how they are calculated?

The lot size is selected so that the notional value surpasses the SEBI-specified minimum threshold amount of Rs. 2,00,000, Rs. 5,00,000, or Rs. 7,50,000 when the current market price is multiplied by a particular number of shares. So, when the share price fluctuates, the Lot Size is also affected.

Suppose the cost of a share is Rs.200, and it needs to have a minimum of 1000 shares in the lot size to meet the lot value of Rs. 2,00,000. In the same way, if the price of the share is reduced to Rs. 150, then, of course, the lot size has to increase accordingly to meet the lot value of 2 lakh, which is why the lot size will be 1334 here.

To comply with SEBI's rules, the lot sizes of various F&O equity instruments are revised from time to time based on their stock price movements. As a result, various equities derivatives have different lot sizes.

Conclusion:

As you can see, the F&O lot sizes for various futures and options contracts vary based on SEBI's requirements and the price of the individual stock or index. To keep your F&O trading in check, you don't lose a lot of money. Assume, however, that you are a retail investor with a preference for high-value contracts. So, you can trade derivatives with a registered stockbroker by opening a Trading and Demat Account.