Lot size of derivative contracts for few stocks revised by NSE

On March 28, the National Stock Exchange (NSE) issued a circular and announced the revisions in the market lot sizes of derivative contracts of 54 stocks among the 182 stocks with such contracts. In this article, we understand lot size and look at the details of the latest circular by NSE.

What is lot size in a derivative contract?

The lot size refers to the standardized quantity of an underlying asset that is traded in a single contract. Lot sizes are predetermined by the stock exchange on which the derivative is traded and can vary depending on the type of derivative and the underlying asset.

Let us take an example for clear understanding. Suppose you are an investor interested in trading futures contracts of a hypothetical company called ABC Ltd. The futures contract for ABC Ltd. has a large size of 100 shares.

If you decide to buy one futures contract of ABC Ltd., you are essentially agreeing to buy 100 shares of ABC Ltd. at the agreed-upon price on the expiration date of the contract.

Assume the current market price of ABC Ltd. is Rs 200 per share, and you decide to buy one future contract. Since the lot size is 100 shares, your total investment would be Rs 200 * 100 = Rs 20,000.

Lot Size Revised: The Details

Here are the details of the changes announced by the NSE:

Of the total 182 stocks with contracts, the lot size of 128 stocks has remained unchanged.

Out of the 54 stocks with changes, 42 stocks will have reduced lot size effective from 26 April, for expiry in May and beyond. Here is the complete list.

For 6 stocks, the lot size has been increased from the current levels. This set of changes will become effective from 26 April for expires in July and beyond. It is important to note that May and June contracts will maintain the current market lots.

The remaining 6 stocks in the set of 54 stocks with changes will see a decrease in the lot size. The change for this set will take effect on April 26 for expiries in July and beyond.

Revision for SMEs

SMEs, or Small and Medium-sized Enterprises, are companies that typically have a relatively small workforce and lower revenue compared to large corporations. The National Stock Exchange (NSE) has a separate platform for SMEs called NSE Emerge.

The NSE has lowered the lot size for 75 actively traded stocks in the SME segment while maintaining the lot size for 216 other stocks.

The stocks for which lot size has been reduced include Agni Green Power, Atmastco, Docmode Health Tech, Digikore Studios, Fonebox Retail, Jet Knitwears, Mono Pharmacare, Sungarner Energies, Basilic Fly Studio, Cellecor Gadgets, Srivari Spices, Madhusudan Masala, Thaai Casting, and Viviana Power Tech. This adjustment in lot size will take effect from April 29, 2024.

Change in derivative contracts: The Impact

Here are some of the impacts of change in lot size on traders who are into derivative contracts:

Capital Requirement: A change in lot size directly affects the capital required to trade a derivative contract. If the lot size decreases, traders with limited capital may find it easier to participate in the market, as they can trade smaller contract sizes. Conversely, an increase in lot size may require traders to allocate more capital to maintain their trading positions, potentially limiting participation for smaller investors.

Liquidity: Lot size changes can impact the liquidity of derivative contracts. A decrease in lot size may attract more traders to participate, potentially increasing liquidity and reducing bid-ask spreads. Conversely, a rise in lot size may lead to decreased liquidity, making it harder for traders to enter and exit positions at desired prices.

Risk Exposure: Lot size changes alter the exposure of traders to underlying assets. A smaller lot size reduces the exposure per contract, allowing traders to manage risk more granularly. On the other hand, a larger lot size increases exposure, potentially amplifying both gains and losses. Traders need to adjust their risk management strategies accordingly.

Strategy Adaptation: Traders may need to adapt their trading strategies in response to lot size changes. For instance, a decrease in lot size may encourage more frequent trading strategies, such as scalping or day trading, while an increase in lot size may favor longer-term positions.

We hope you have learned something new.