Do you know the basic difference between futures and forwards? Futures represent an improvement over forwards in two ways. Firstly, futures are traded on a recognized stock exchange and hence are extremely liquid. More importantly, future are standardized while forwards are not standardized, which is why they are often referred to as over the counter (OTC) products. When we refer to futures as standardized what does it mean? One of the implications is that there is standardization of trading lots, strike prices, expiry. The market lot in India is also referred to as lot size and the lot size of the stock or the Nifty differs based on the current market price. The whole idea of lot sizes is about standardization. When a stock has a lot of size of 1000 shares, then trades can only be put in the system in multiples of 1000 shares. You cannot buy 500 shares nor can you buy 1500 shares in this case. You can either buy 1000 shares (1 lot), 2000 shares (2 lots) and so on. That is the concept of a market lot in Futures and options.
Remember, the concept of lot size is only applicable to stocks and indices that are included in F&O; not for others. Look at the live illustration below, which is a price snapshot of RIL August 2018 futures. The lot size of RIL has been circled. Since the Reliance Futures are current quoting at Rs.1123.60, the value of 1 lot of RIL will be Rs.11,23,600/-.
Effectively, when you buy and sell RIL futures or RIL options, your minimum order size has to be worth Rs.11,23,600/-. You really do not need to panic as this is the notional value of the contract and you will only be required to pay a margin of around 15% to 20% to initiate a buy or sell trade in the RIL stock futures.
How lot-sizes decided in the first place?
When futures were first introduced into India, the lot value was fixed at approximately Rs.2 lakhs. The idea back then was to keep the minimum investment at a slightly higher level so that retail investors are deterred from participating too aggressively in the F&O market. SEBI was always worried that too much retail participation in the F&O market would lead to unnecessary speculation and losses for small investors. While SEBI had initially fixed Rs.2 lakh as the indicative lot size, it was hiked to Rs.5 lakhs in the year 2015 with a view to discouraging retail investors from speculating in F&O. In fact, new additions to the F&O list are being included with a minimum lot value of Rs.7.50 lakh and there is a proposal to change the lot value to Rs.10 lakh so that only informed investors and traders actually trade in the F&O market. Most traders look at F&O not in terms of lot sizes but in terms of the margin requirement. When the Nifty lot value was at Rs.2 lakh, the initial margin required for 1 lot of Nifty was just about Rs.25,000 and that made it accessible to small traders. In most cases, they did not understand the actual implications of F&O and ended up with huge losses.
Are the lot values standardized at all times?
Underlying
Lot Size
CMP (11-May-2018)
Lot Value
Nifty
75
11,095
Rs.8.32 lakh
Bank Nifty
40
27,056
Rs.10.82 lakh
ACC
400
1,297
Rs.5.19 lakh
Britannia Industries
200
6,440
Rs.12.88 lakh
Reliance Industries
1000
1,124
Rs.11.24 lakh
Tata Steel
1061
518
Rs.5.50 lakh
Tata Motors
1500
258
Rs.3.87 lakh
Source: NSE
Obviously lot values cannot be standardized because stock prices keep moving dynamically. In the above case, you find that lot value of Britannia at Rs.12.88 lakhs and RIL at Rs.11.24 lakhs. However, the lot value of ACC is just Rs.5.19 lakhs while the lot value of Tata Motors is a mere Rs.3.87 lakh. This is driven by price movement. For example, in the last 1 year RIL and Britannia have been strong outperformers while ACC and Tata Motors have been the rank underperformers. As a result, while all these stocks started out around the same lot value, over time they diverged due to the price movement in opposite directions.
Finally, how and when are lot sizes modified?
The lot sizes are essentially pegged to the indicative lot values but these lot values keep changing along with the stock price over time. For example, a stock with a lot size of 1000 shares with a price of Rs.710 will have a lot value of Rs.7.10 lakh. However, if the price of the stock goes up to Rs.950 over the next 1 year then the lot value automatically changes to Rs.9.50 lakhs. In such cases, SEBI will look to modify the lot size at an appropriate time. Once the lot sizes are modified, there will be a greater parity in the lot values.
Just as lot sizes are reduced when prices go up, the lot sizes are also increased when prices correct sharply. For example, in the case of Tata Motors, there is a genuine case to take the lot size up from 1500 to 3000 in the light of the sharp price correction. SEBI routinely revises the lot sizes on the upside and on the downside. Since lot values keep changing in tandem with stock price movements, it becomes essential to shift lot sizes accordingly.
Such lot size revisions are done on a regular basis based on the stock price movements. The crux of the matter is that since indicative lot values are fixed the individual lot sizes have to be fixed based on the market price of the stock or the index. That is why lot sizes differ!
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.
These revisions are based on factors, such as stock price, liquidity, and risk. The most significant change is the halving of lot sizes for F&O contracts of 42 stocks. This adjustment aims to enhance flexibility and accessibility for traders.
SEBI is the apex body that decides the lot size of each company that is involved in stock trading. When Futures and Options trading came into existence, it was the regulatory body that had decided the notional value of Rs 2,000,00.
The lot size is the number of units of securities/assets traded on the stock exchange. Trading in a single unit is not viable, so the shares or number of units are brought in a lot size. Calculating a lot size involves considering several variables, including risk percentage, stop loss and account balance.
The lot size is the minimum number of shares that we need to buy/sell if we wish to agree. The lot size for the TCS futures is 125, which means a minimum of 125 shares (or a multiple of 125 shares) have to be transacted while trading the TCS futures.
With Iceberg orders, an order to buy 10000 or 200 lots of Nifty or more can be placed at the same time. This will not only mean not having to place multiple orders in case of a large order but also help reduce impact costs. Freeze quantity limits can be checked under Volume Freeze Quantity on the NSE website (WEB).
A lot in terms of options represents the number of contracts contained in one derivative security. One equity option contract represents 100 underlying shares of a company's stock. The lot for one options contract is 100 shares.
You should now sell the month's Out of the Money (OTM) Nifty options. To sell one lot of Nifty options, a margin of Rs.1,00,000 is required. If your expected return is 1% per month, you must earn Rs.
Lots determine the quantity of currency units traded in a transaction, influencing the size of positions and potential gains or losses. Proper lot sizing is crucial for managing risk, preserving capital, and maintaining trading discipline.
Lot sizes of Nifty Financial Services or FINNIFTY has been cut from 40 to 25, and that of Nifty Midcap Select or MIDCPNIFTY has been cut from 75 to 50. The lot size of contracts of Nifty Bank or BANKNIFTY has been left unchanged at 15.
A standard lot size is 100,000 units of the base currency in a forex trade, mini-lots are 10,000 units and micro-lots are 1,000 units. When choosing the most suitable lot size for them, traders should consider the size of their account, risk tolerance and trading strategy, among other factors.
The different lot sizing techniques implemented across industrial companies can be categorized into static, periodic, or dynamic. Static lot sizing consists of placing a fixed order quantity or ordering exactly the amount that is needed to cover forecasted demand.
As a general rule, homes on larger lots have a higher property value than similar houses on smaller lots in the same area. How much higher may depend on other neighborhood factors. The location makes a difference in how valuable a larger plot of land is to home buyers.
Earlier, we said that the best lot size for a beginner is a micro lot, meaning you must at least have 1000 units to begin with this account. But if you cannot afford a $1000 account, you can always go for leverage of 1:10 if you have $100. Let's say for instance, you go for leverage of 1:1000 with only $100.
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