Lot size
Also written Contract size · Market lot
The minimum quantity that must be traded and, on a delivery contract, actually delivered at expiry — equal to or higher than both the trading unit and the minimum order quantity.
In plain language
You cannot buy 700 grams of gold on a commodity exchange. You buy one lot, and the lot is one kilogram.
Standardisation is what makes a futures contract fungible, and the lot size is the quantity half of that standard. It is fixed by the exchange in the contract specification, it is the same for everyone, and on a compulsory-delivery contract it is the quantity that physically has to move if you are still short at expiry.
Because delivery is real, the lot size is a commitment, not a convenience. It is the reason a small trader can speculate on maize but cannot casually let a maize position run into the tender period.
How it works
Three quantities appear in every contract specification and the workbook keeps them distinct:
- Trading unit — the quantity for which the price is quoted (for example, 10 grams of gold).
- Lot size — the minimum tradeable and deliverable quantity. It shall be equal to or higher than the minimum trading unit, and equal to or higher than the minimum order quantity.
- Quotation factor — the unit the price refers to, used to convert a tick into rupees.
The workbook's own lot sizes: Gold 1 kilogram, Silver 30 kilograms, Castor seed 5 MT, Zinc 5 MT, Electricity 50 MWh, guar seed 1 MT (10 quintals).
For index futures the rule is a value, not a quantity: the lot must be worth at least Rs 5 lakh on the launch date and on every rebalancing date. At a base index of 1,000 that works out to 500 units. Within the year the lot stays fixed in units, so its rupee value drifts with the index; at the next rebalancing it is reset if the value has slipped below Rs 5 lakh.
For options, lot size is deliberately copied from the underlying futures — for Options on Futures so that devolvement does not create a quantity mismatch, and for Options on Goods so that netting against futures deliveries does not leave odd lots.
The formula
Tick value = (Lot size / Quotation factor) x Tick size
Gold: quoted per 10 grams, lot 1,000 grams, tick Re 1 per 10 grams
(1,000 / 10) x 1 = Rs 100 per tick
Zinc: quoted per kilogram, lot 5 MT = 5,000 kg, tick Rs 0.05
(5,000 / 1) x 0.05 = Rs 250 per tick
A worked example
The workbook's netting illustration, in rupees.
A processor holds a call option on goods in a commodity whose lot size is 10 MT. He is long 2 lots (20 MT) of calls and separately short 1 lot (10 MT) of futures on the same commodity, both expiring on the 20th.
At expiry, with a Final Settlement Price of Rs 5,500 per quintal:
| Leg | Quantity | Direction | Value |
|---|---|---|---|
| Options on goods exercised | 20 MT = 200 quintals | Receive delivery | Rs 11,00,000 |
| Futures short | 10 MT = 100 quintals | Give delivery | Rs 5,50,000 |
| Net obligation | 10 MT = 100 quintals | Receive delivery | Rs 5,50,000 |
Because both instruments carry the same 10 MT lot, the netting lands on exactly one whole lot. Had the option lot been 8 MT, the net would have been 6 MT — an odd lot that no warehouse receipt matches and the clearing corporation cannot deliver. That, and nothing more elegant, is why lot sizes are kept aligned.
Why NISM asks about it
Chapter 6 (Trading Mechanism), section 6.4, which lists lot size among the contract specifications, and Chapter 4 (Commodity Options), section 4.6, on why option lots mirror futures lots. Expect a tick value computation — the single most common numerical question built on lot size — and the Rs 5 lakh minimum for index futures lots.
Common exam traps
- Lot size is not the trading unit. Gold trades in lots of 1 kg but is quoted per 10 grams; getting the two the wrong way round destroys every rupee figure that follows.
- The Rs 5 lakh index rule is checked on the launch date and at each rebalancing — not continuously. Between rebalancings the lot value can and does fall below Rs 5 lakh.
- Lot size in units stays constant through the year for an index future; it is the contract value that moves.
- Option lot size equals the underlying futures lot size, but tick size need not — an option tick can be finer, because it applies to the premium, not to the full value of the commodity.
- For a cash-settled contract the lot is still a quantity, not a notional — it is the quantity on which the expiry difference is computed.
- Lot size must be equal to or higher than the trading unit and the minimum order quantity. It is never smaller than either.
Check yourself
1.The minimum lot size of a commodity index futures contract must have a value of at least Rs 5 lakh. When is this Rs 5 lakh test applied?
- a)Continuously — the lot size is adjusted whenever the contract value falls below Rs 5 lakh
- b)On the index futures launch date and on every rebalancing date thereafter
- c)Only on the launch date of the index futures contract
- d)At the beginning of every calendar month
Show the answer
Answer: (b) On the index futures launch date and on every rebalancing date thereafter
The order or lot size must be such that its value shall be at least Rs 5 lakhs on the index futures launch date and every rebalancing date thereafter.
What happens in between is the subtle part: during the year when weights are constant and not rebalanced, the order/lot size in units remains constant, so the total value of the lot may change as the underlying futures move. However, on rebalancing of the index for the next year, lot size would have to be changed if the total value of the contract falls below Rs 5 lakhs.
So the rupee value of a lot floats freely through the year — the Rs 5 lakh floor is a test applied at two moments, not a level continuously maintained.
With a base of 1000, Rs 5 lakh means 500 units, and the tick size is Rs 0.25, though tick size can vary depending on the exchange.
2.The lot size for a regular gold contract is 1 kg, gold is quoted in rupees per 10 grams, and the tick size is Re 1 per 10 grams. What is the tick value?
- a)Re 1
- b)Rs 10
- c)Rs 100
- d)Rs 1,000
Show the answer
Answer: (c) Rs 100
Tick Value = (Lot size / Quotation factor) × Tick size
- Lot size = 1 kg = 1,000 grams
- Quotation factor = 10 (gold is quoted per 10 grams)
- Tick size = Re 1
- ⚠️ Tick value = (1,000 / 10) × 1 = Rs 100
The workbook's second example, for contrast:
Gold Zinc Quotation factor Rupees per 10 grams Rupees per kilogram Lot size 1 kg (1,000 grams) 5 MT (5,000 kg) Tick size Re 1 Rs 0.05 Tick value (1,000/10) × 1 = Rs 100 (5,000/1) × 0.05 = Rs 250 The quotation factor is the number of units the quoted price refers to — 10 for gold, 1 for zinc. Getting this wrong by a factor of ten gives you Rs 1,000 (option d), which is why the divisor is worth checking before you multiply.
Why tick value matters: the impact of change in price by one tick plays a significant role in entry and exit decisions for market participants.
3.A trader holds 500 kg of silver. SD of change in spot is 1.17, SD of change in futures is 0.62, correlation is 0.60, and the futures lot size is 30 kg. How many lots should be sold?
- a)17 lots
- b)19 lots
- c)10 lots
- d)9 lots
Show the answer
Answer: (b) 19 lots
- ⚠️ Hedge ratio = 0.60 × (1.17 / 0.62) = 1.132258
- ⚠️ Optimal hedge = 1.132258 × 500 = 566.18 kg of futures
- ⚠️ Contracts = (500 × 1.1322) / 30 = 18.87 → 19 LOTS
Option (a)'s 17 lots is what you get from 500/30 = 16.67 rounded up — the "obvious" answer that ignores the hedge ratio entirely. That would leave the trader under-hedged, because here the ratio is above 1.
Why above 1? Spot moves 1.17 for every 0.62 of futures movement — nearly twice as much. Each futures lot therefore does less work than a matching quantity of metal, so more lots are needed.
Compare the workbook's other example, where the ratio runs the other way: 0.93 × (3.56/3.63) = 0.912, so a 50 MT exposure at 5 MT lots needs 9 contracts, not the full 10 — because there futures are the more volatile leg. The general lesson: matching quantity does not match risk.
And he should SELL — he holds physical silver and fears a fall, so this is a short hedge, which involves sale of futures to offset potential losses from falling prices.
The workbook adds a reality check: a correlation of 0.60 is "for explanation purpose" — in a liquid, transparent market it "would generally be much higher, because of which beta and hedge ratio will also be higher."
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Tick sizeThe smallest price change a contract may be quoted in — prices move only in whole multiples of it, and it differs from one commodity to another.
- Tick valueThe rupee profit or loss on one contract when the price moves by a single tick — lot size divided by the quotation factor, multiplied by the tick size.
- Options on GoodsA European option whose exercise devolves directly into delivery of and payment for the physical commodity, rather than into a futures position.
- UnderlyingThe asset a derivative contract derives its value from — the index, stock, bond or currency whose spot price drives the contract. The derivative has no value of its own without it.