What is Lot Size in Options Trading?
Options and futures are derivative instruments that derive their value from underlying assets like stocks, commodities, and currencies. The trading of options and futures takes place on stock exchanges. The contracts are standardised based on minimum lot sizes issued by F&O exchanges.
What is Lot Size?
Lots in Futures and options are the minimum quantity of shares that one can buy or sell as per terms of the contracts. SEBI, the apex regulatory body, has defined lot sizes of all stocks and indices permitted to trade in F&O exchanges. For example, the lot size of Nifty 50 is 50 shares, so one wanting to trade in options can do so in multiples of 50 only.
The value of Nifty 50 options contract is the product of the lot size and its trading price. Suppose one buys options of lot size 200, and the value of the Nifty 50 contract is Rs. 7,500. So, the total value of the contract is 200*Rs. 7,500 = Rs. 15,00,000.
Also, read – How to Trade in Futures and Options
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How are Lot Sizes Fixed for Options and Futures?
SEBI determines lot values. Initially, when futures and options trading started, the regulator had fixed the notional lot value at Rs. 2 lakh. Then, the regulator fixes lot sizes at a relevant number that would give a notional value of more than 2 lakh when multiplied by the market price. The idea behind this move was to keep the notional value so high that small retail investors do not participate in speculative trading aggressively and avoid enormous losses.
In 2015, as the income and purchasing power of the masses increased, the lot value was revised to Rs.5 lakh. New additions are included to F&O list that would keep the value at Rs. 7.5 lakh. Values of lot sizes of different companies are in the range of Rs. 5-10 lakh. SEBI generally revises lot sizes when the lot value diverges sharply from their determined range.
Why are Lot Sizes Modified?
SEBI revises lot sizes periodically whenever there is a drastic change in share value leading to significant divergence with lot values. For example, a company has shares in a lot size of 1000. The F&O trading price is Rs. 225; so, the lot value is Rs. 2.25 lakhs.
Over a period of time, trading price increased to Rs. 620. Now according to fixed lot size, the lot value becomes Rs. 6.20 lakh, which is a big divergence from indicated lot value determined by SEBI. In this case, the regulator may revise the lot size downward to 300. So, the lot value changes to Rs. 3 lakh, which is a better reflection of lot value.
In case of stock price correction, SEBI increases lot size to maintain the lot value. Changes in stock prices lead to revision or modification in lot sizes of futures and options.
Purpose of Lot Size
The main reason for F&O trading in lot sizes is standardisation in markets. Standardisation can be done in many ways; for example, all future & options contracts expire on the last Thursday of the month. Furthermore, futures and options across indices come with 1 month, 2 months and 3-month tenure. Finally, determining and fixing lot sizes of stocks in F&O trade is a primary standardisation method.
Final Word
The lot size is a very important feature of F&O trading. SEBI constantly keeps a tab on lot sizes and the indicative lot value to stop excess speculation and prevent small retail traders from incurring enormous losses.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.