What Is Lot Size In Options Trading?

By Angel One | Published on 24 May 2022 | 238

What Is Lot Size In Options Trading?

Options traders usually trade in ‘lots’. But if you are a beginner, the word may sound foreign to you. So, before participating in F&O trading, let’s clear all doubts regarding lot size.

Futures and options trading is unlike stock trading. F&Os are derivatives that derive their values from the underlying stocks, ETFs, or commodities. Futures and options have lot sizes to standardise and facilitate smooth trading. To understand options trading, one needs to learn about lot size.

Explaining lot size

In general terms, lot size refers to the quantity of an item ordered for delivery on a fixed date. In trading, lot size is the number of stocks you buy in a single transaction. A lot signifies the minimum number of scrips one can buy or sell in an options trading contract. SEBI is responsible for deciding the lot size for F&O traders. It uses lot size to control the price quote in the market.

The lot size refers to the size of transactions you make in the financial market. Since lot size is defined, traders always know the price they are paying for each unit. Without specified lots, there won’t be any standardisation price and no uniformity of the bulk.

Let’s understand what lot size is with an example.

The lot size for NIFTY50 is 50 shares. So, traders can only buy it in the multiple of 50 only.

The value of the options contract in the product of the number of units and price of each. So, if NYFTY50 options’ price is 7000 and one buys a lot size of 100. The total value of the contract is Rs7000*100 or Rs 7,000,00.

SEBI has defined lot size for every stock and index available for derivative trading. It is important to recognise that the lot size is not uniform. Different shares have different lot sizes.

How SEBI fixes the lot size

SEBI, as the apex body, is responsible for deciding lot size. At first, the indicative lot size was Rs 2 lakh. Later SEBI specified the lot size to determine the notional value. When multiplied by the current market price, the lot size should give a value above Rs 2 lakh. In 2015, the limit was upped to Rs 5 lakh. Presently, SEBI is weighing possibilities to further enhance the minimum limit to Rs 10 lakh. The newly introduced stocks for options trading have a lot size of Rs 7.5 lakh. It indicates that lot size is not a fixed quantity. SEBI exercises lot size to sideline retail investors and restricts the entry of uninformed investors.

On October 29, 2021, SEBI revised the lot size of several stocks.

Lot size Modification Number of F&O stocks Effective Date and Expiry
Lot size modified downwards 34 stocks Effective October 29, 2021, for November expiries and later
Lot size pegged upwards 5 stocks Effective October 29, 2021, for January expiries and later
Lot size unchanged 127 stocks Not applicable
Revised down (not multiple of old lot size) 6 stocks Effective October 29, 2021, for January expiries and later

Rationale behind lot size change

The lot size is not fixed and keeps changing with the change in the stock price. For instance, a share with a lot size of 1000 and price of Rs 205 has a lot value of Rs 205,000. Suppose the stock price changes to Rs 500 in one year and the lot value changes to Rs 500,000. In such a case, SEBI may modify the lot size to 500 to modify the contract value to Rs 250,000 – a more reasonable indicative lot value.

Purpose of fixing lot size

The lot size is the key to understanding F&O trading. The primary difference between futures and forward is that futures are standardised, while forwards are not. So, F&O have a ready secondary market. The lot size in futures is a standardisation metric, with fixed expiry and timeframe. Lot size allows transparency by telling traders the number of units they are paying for.

Secondly, it is a tool in the hands of SEBI to control the F&O market. SEBI is concerned about rising speculation in the derivatives market, and smaller lot size will open gates for small investors to enter the domain without accurate knowledge and awareness. It might alter the risk appetite of small investors and make the F&O segment extremely volatile, even for experienced traders. SEBI modifies lot size to create an entry barrier to restrict retail participation and speculation.

Wrapping up

Lot size definition is a key to knowing about F&O trading. Whether or not you want an entry into options trading, it is a vital concept to learn. F&O give you the leverage to amplify your profit, but one needs a full understanding of the implications arising from such trades. Otherwise, the loss can be enormous due to market volatility and high contract value.