What Is Lot Size in Futures and Options Trading?
Lot size refers to the minimum ticket size of shares that can be traded in futures and options. This standardization is necessary to create a secondary market for these products, as it allows for odd lots of futures to be sold or bought in multiples of the minimum lot size. The lot size for futures and options is the same, and is based on a notional value for the contract.
Why Is Lot Size Important in Futures and Options?
Lot size is necessary in futures and options trading to standardize the market and make it more accessible to retail investors. The Securities and Exchange Board of India (SEBI) determines the lot sizes for stocks and indices traded in futures and options, and regularly updates this list. Lot sizes are typically set at a notional value of between INR 7-10 lakh (approximately $9,500-$13,500).
How Are Lot Sizes Fixed in Futures and Options?
SEBI determines the lot sizes for futures and options based on the notional value of the contract. In the past, lot sizes were fixed at INR 2 lakh (approximately $2,700), but this was increased to over INR 5 lakh (approximately $6,800) in 2015 to better protect retail investors from the risks of these products. If a stock or index experiences a significant price change, its lot size may also be adjusted to bring it closer to the indicative value range.
Why Are Lot Sizes Modified in the Futures and Options Market?
Lot sizes in the futures and options market may be modified due to changes in the price of the underlying stock or index. For example, if a stock with a lot size of 1,000 shares at a price of INR 600 experiences a significant price increase, its lot size may be adjusted to bring it closer to the indicative value range. This helps to maintain a balance between the risks and returns of futures and options trading.
Conclusion
Lot size is an important concept to understand in futures and options trading, as it determines the minimum ticket size for these products. Lot sizes are standardized to create a secondary market for futures and options and to protect retail investors from the risks of these products. SEBI regularly reviews and adjusts lot sizes to ensure that they remain within the indicative value range.
