Have you ever wondered why there are different stock lot sizes in futures and options trading? The idea is to standardize trading to a certain value, which is comparable so that you compare apples and apples rather than apples and oranges. Here we look at share lot size in much greater detail and its practical application as well as the modus operandi.
Markets lots different for different stocks
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 share lot size. A share lot size in futures is a minimum ticket size of shares that you can trade in futures. Remember that when trading futures and options, you can only buy and sell these products in a minimum of one lot or multiples of the share lot size. For example, the share 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. The product of lot size and the price gives you the notional value of the futures contract.
How SEBI defines different lot sizes
Apart from standard expiries, another important method of standardizing futures contracts is through share lot size. SEBI defines share lot size for all the indices and stocks that are permitted to. Here is a quick sampler.
| 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 |
But how were these numbers decided by SEBI, or is it plain random? To understand this evolution, delve a bit into history. Initially, SEBI had fixed Rs.2 lakh as the indicative lot size 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 and that was in vogue till the year 2015.
In 2015, to check speculation by retail investors in futures and options, SEBI hiked lot sizes. 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, the lot size values vary between Rs.5 lakhs and Rs.10 lakhs. Only if the lot value diverges sharply from this range, SEBI initiate change in lot sizes.
Modification of lot sizes
Lot sizes are not static and they keep changing continuously. 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 becomes too expensive for most traders to pay margins and affects liquidity. Then, 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 just an example.
The reverse logic applies in the case of stock price corrections. In such cases, SEBI revises the lot size upwards. 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. That is why lot sizes differ across stocks and these lot sizes get modified over time. 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 makes them comparable for F&O trading.
What is lot size?
The lot size is the minimum size in which the stock futures or index futures can be traded. For example, RIL has a lot size of 250 shares and that will be the size of 1 lot. You can only buy and sell futures in a minimum of 1 lot and then in multiples of 1 lot. Similarly, for the Nifty, the lot size is 75 shares. This is part of the standardization of futures by the exchange.
How can we hedge the futures in the stock market?
You can hedge futures either by locking in your profits or by locking in your losses. For example, if you are long on a stock and you sell futures below the buy price then the difference is your maximum loss. Normally trades turn back and cover the short position and then use the profit to reduce the cost of holding the stock.
The other alternative is to lock in profits through hedging. For example, If you bought a stock at Rs.350 and if the futures price is now Rs.440, you can sell futures at Rs.440 and lock in the profit of Rs.90. Irrespective of how high or how low the price goes now, your profit of Rs.90 is locked into the hedge trade.
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Frequently Asked Questions Expand All
What is a lot in forex?
In forex trading, especially when you trade exchange traded currency futures, the lot size is decided in terms of currency amounts. For example, when you are trading long or short on USDINR futures, the lot size is decided at $1000 value. Since the current exchange rate is Rs.74/$, you are looking at a notional value of Rs.74,000 for the forex lot.
Who decides the lot sizes?
Lot sizes are decide das per the guidelines issued by SEBI. There is a derivatives review committed that regularly review lot sizes and lot values based on latest price movements and then determines the new lot sizes based on price movement. The effective date is decided and all contracts get adjusted to the new lot size.
