Futures and options are vital derivative instruments for traders as they help mitigate losses and expand profit margins. This type of trading is done on the stock exchange. The Securities and Exchange Board of India (SEBI) is responsible for issuing the minimum and maximum lot sizes based on which contracts for F&O can be entered into.
 

SEBI has decided to revise the lot size of securities for F&O contracts starting from 26 April 2024, which you must know as a trader.

• Futures and options trading is a reliable strategy used by traders to mitigate the impact of market volatility.
• The Securities and Exchange Board of India governs trading in the F&O market by setting contract standards and issuing the lot size of stocks that can be traded in the F&O market.
• SEBI has decided to revise the lot size of securities for F&O trading w.e.f 26th April 2024. 

Simply put, a lot size is the minimum number of stocks that can be traded through F&O contracts. SEBI fixes these quantities based on factors such as market conditions and volatility.
 

Additionally, the lot size is periodically revised to ensure that retail investors are not engaging in F&O trading based on their impulse and emotional decisions. The primary purpose of determining lot size is to bring standardisation to the market.

Following the guidelines issued by the SEBI, the National Exchange Board of India issued a circular providing details of the revision of lot size. For example, let us look at a list of revised lots for the NIFTY market:

The changes in the lot size impact the trading methods significantly. Here are some impacts that are expected with the latest revisions:
 

Capital requirement

The change in lot size directly impacts the capital requirement to trade in the F&O market. If the lot size decreases, traders can trade even with less capital and vice versa.
 

Let’s take an example to simplify this further. Say you want to trade with NIFTY 50 in the F&O market. The revised price now requires you to trade in the multiples of 25 as opposed to the earlier requirement of 50.
 

Liquidity

When the lot size is low for F&O contracts, more traders can enter the market, which increases liquidity and reduces the chance of bid-ask spreads. On the other hand, when the lot size increases, it leads to low liquidity, as traders find it difficult to spot entry and exit points.
 

Risk exposure

The lot size impacts the risk exposure for traders per contract. If the lot size is altered to get lower, the risk attached to every contract also decreases. This also allows traders to conveniently mitigate risks.

SEBI revises the lot size to meet the needs of changing market conditions that affect stock value, leading to evident divergence in lot values. Staying updated concerning lot sizes is crucial if you want to enter the futures and options market.