One of the unique features of exchange-traded futures in India is that they are standardized. One of the methods of standardizing futures and options contracts is through the prescription of minimum lot sizes. A lot size in futures is a minimum ticket size of shares that you can trade in futures. When trading futures and options, you can only buy and sell these products in a minimum of one lot or multiples of the lot size. For example, the lot size of Nifty is 75 units so you can only trade Nifty in multiples of 75. Similarly, Reliance has a lot size of 250 shares and you can only trade RIL futures and options in multiples of 250 shares only.
Futures lot size and options lot size is the same. When you talk of futures lot size, the product of the lot size and the price is the notional value of the futures contract. To understand what is lot size, let us break down the discussion on lot sizes into several sub-components and then look at lot size futures in greater detail.
What are lot size futures and options?
One of the keys to understanding F&O trading is to understand the concept of lot sizes. This is one of the methods of standardizing trading in F&O. The key difference between futures and forwards, if you recollect, is that futures are standardized while forwards are over-the-counter (OTC) products. One of the ways of standardizing futures is through the use of lot sizes which gives them a ready secondary market. For example, if someone wants to sell an odd number of shares in the future and there are no buyers, you have a problem. This can be addressed with the use of standard lot sizes.
Apart from standard expiries, another important method of standardizing futures contracts is through lot sizes. SEBI defines lot sizes for all the indices and stocks that are permitted to trade in F&O, the list of which is constantly updated by SEBI. We understand lot sizes 101 and then move on to why different stocks have different lot sizes.
| Underlying | Lot Size | CMP (16-Jun-2021) | Lot Value |
|---|---|---|---|
| Nifty | 75 | 15,768 | Rs.11.83 lakh |
| Bank Nifty | 25 | 35,003 | Rs.8.75 lakh |
| ACCESS | 500 | 2,020 | Rs.10.10 lakh |
| Asian Paints | 300 | 3,018 | Rs.9.05 lakh |
| Britannia Industries | 200 | 3,630 | Rs.10.96 lakh |
| Bharti Airtel | 1851 | 536 | Rs.7.26 lakh |
| Reliance Industries | 250 | 2,210 | Rs.5.53 lakh |
| Tata Steel | 850 | 1,140 | Rs.9.69 lakh |
| Tata Motors | 2850 | 348 | Rs.9.92 lakh |
How are lot sizes fixed in futures and options?
To understand this evolution, you need to delve a bit into history. Initially, SEBI had fixed Rs.2 lakh as the indicative lot size value for a stock or index. Remember, these are notional values and not actual margins payable. Your margin on futures will be a fraction of this notional value. The lot size is fixed at the relevant number of shares which if multiplied by the current market price would give a notional value of above Rs.2 lakh. This was the practice till the year 2015.
In the year 2015 SEBI decided to further check speculation by retail investors in futures and options as many of them did not understand the risk involved. SEBI modified indicative lot sizes to above Rs.5 lakh with new inclusions being included in the F&O list with a notional value in the range of Rs.7.50 lakh to Rs.10 lakhs. Today, if you look at the table above, the lot size values typically vary on an average between Rs.5 lakhs and Rs.10 lakhs. Only if the lot value diverges sharply from this range does SEBI initiate a review to modify the lot sizes to bring them into a more normalized level.
Why are lot sizes modified in the futures and options market?
As we saw, there is an indicative value range that is maintained for lot sizes. While the lot sizes are pegged based on the indicative lot values at a point in time, the notional value per lot changes if the stock is in a sharp up move or a sharp down move. For example, a stock with a lot size of 1000 shares when the price is Rs.600 will have a notional value of Rs.6 lakhs per lot. Now if the stock rallies from Rs.600 to Rs.1,500, the lot value changes to Rs.15 lakhs, which makes it tough for most traders to pay margins and affects the liquidity. In such cases, the SEBI would decide upon reducing the lot size to say 500 so that the lot value can be brought to a more palatable level of Rs.7.50 lakhs. This is an ongoing process.
The reverse logic applies in the case of stock price corrections. In such cases, SEBI revises the lot size upwards to make it more compatible with the indicative lot value. Such lot size revisions are done on a routine basis. The point to note here is that since indicative lot values are fixed the individual lot sizes have to be continuously reviewed and modified based on the market price movements of the stock or the index. That is why lot sizes differ across stocks and these lot sizes get modified over time. For example, if you look at the table, the Bank Nifty with a unit price of 35,003 has a lot size of 25 shares, while Asian Paints with a price of Rs.3,018 has a lot size of 300 shares. However, the notional value of both stocks is almost equal and that becomes the basis for trading in F&O.
Where can i view futures contracts?
Futures contract prices are available on the NSE website and also on the trading terminals. You just need to define the exact specification of the futures like which stock or which index and which particular monthly contract (near month, mid-month, or far month). Once that is specified, you can see the futures contract price in front of you on the screen. You can then buy or sell the futures contract at the stated price just like you buy and sell stocks in the market using your trading account.
What is the expectancy model?
The expectancy model was put forward by Victor Vroom of the Yale School of Management. It suggests that behavior is motivated by anticipated results. An individual decides to behave in a certain way based on the expected result of the chosen behavior. For example, people will be willing to work harder if they think the extra effort will be rewarded.
This has important implications for investments. For example, people make choices based on how they expect the effort to lead them to the desired result. For investments, this model is used to understand how investors would react to various stimuli.
