Lot size
Also written Contract size · Market lot · Contract multiplier
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.Why is the lot size of an Option on Futures kept the same as that of its underlying futures contract?
- a)To avoid a mismatch in quantity and trading lot when the option devolves into the futures
- b)Because SEBI requires every derivative on a commodity to share one lot size across all exchanges
- c)So that the option premium equals the futures margin
- d)Because the tick size of options must equal that of futures
Show the answer
Answer: (a) To avoid a mismatch in quantity and trading lot when the option devolves into the futures
"As the Option on Futures devolves into the Futures itself, LOT SIZE OF THE TWO ARE KEPT SAME TO AVOID MISMATCH IN QUANTITY AND TRADING LOT AT THE TIME OF DEVOLVEMENT."
The same logic applies to Options on Goods, for netting delivery obligations: "keeping same order size and lot size is important as this would help the clearing corporations avoid the problems of ODD LOT DELIVERIES after the process of netting off."
Why the other options are wrong:
- (b) The reason given is devolvement, not a single lot size fixed by SEBI across exchanges. Chapter 1 notes that SEBI now allows different versions of the same commodity, such as mini contracts.
- (c) Premium and margin are unrelated to lot size in this sense.
- (d) The workbook says the reverse about tick size: "Tick-size of Options MAY BE LOWER than that of underlying Goods' Futures as it is on Option Premium only."
2.In options terminology, what is "open interest"?
- a)The interest earned by the option writer on the premium received
- b)The premium paid for options traded during the day
- c)The total number of (put/call) option contracts outstanding for an underlying asset
- d)The number of option contracts exercised on the expiry day
Show the answer
Answer: (c) The total number of (put/call) option contracts outstanding for an underlying asset
"OPEN INTEREST: Open interest is THE TOTAL NUMBER OF (PUT/CALL) OPTION CONTRACTS OUTSTANDING FOR AN UNDERLYING ASSET."
Why the other options are wrong:
- (a) Open interest has nothing to do with interest rates or earnings on premium. The word "interest" here means positions.
- (b) Premiums traded during a day measure turnover, not contracts outstanding.
- (d) Exercised contracts stop being outstanding. Open interest counts what is still open.
Nearby definitions from the same list: Lot size is "the number of units of underlying asset in an options contract." Expiration day is "the day on which the options contract ceases to exist. It is the last trading date/day of the contract."
3.A trader holds a call option on futures with a strike price of Rs 1,700, and it is exercised. At what price is the resulting futures position opened?
- a)At the futures Daily Settlement Price on the option expiry day
- b)At the spot polled price on the expiry day
- c)At the strike price of Rs 1,700 — he gets a buy position in futures as if bought at Rs 1,700
- d)At the strike price plus the premium paid
Show the answer
Answer: (c) At the strike price of Rs 1,700 — he gets a buy position in futures as if bought at Rs 1,700
"ALL SUCH DEVOLVED FUTURES POSITIONS SHALL BE OPENED AT THE STRIKE PRICE OF THE EXERCISED OPTIONS. It means FOR STRIKE PRICE OF RS 1700, CALL BUYERS WILL GET A BUY POSITION IN FUTURES, ASSUMING IT IS ALREADY BOUGHT AT RS 1,700."
Chapter 4 repeats this in its terminology section: "In case of devolvement into Futures, all such devolved futures positions are considered to be devolved AT THE STRIKE PRICE of exercised options, on the expiry date of options, during the end of the day processing."
Why the other options are wrong:
- (a) The DSP is used to decide whether the option is ITM (it becomes the option's FSP). It is not the price at which the futures position opens. The gap between DSP and strike then shows up as mark-to-market.
- (b) Spot polling produces the FSP for Options on Goods, not for options on futures.
- (d) The premium was paid upfront and is not refunded. It plays no part in the devolvement price.
Also: "As the Option on Futures devolves into the Futures itself, LOT SIZE OF THE TWO ARE KEPT SAME to avoid mismatch in quantity."
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.
- Unit of tradingThe quantity in one contract — for Indian bond and T-Bill futures, notional bonds of Rs 2 lakh face value, which is 2,000 units of Rs 100 — and the reason exposures round rather than match.
- Maximum tenorThe 12-month ceiling on a commodity index derivative — an index futures contract may not run longer than 12 months, and index options are permitted up to 12 months of expiry.
- Options on FuturesA European commodity option whose underlying is a futures contract, so exercise devolves into a futures position opened at the strike price rather than into delivery of the goods.
- Options on GoodsA European option whose exercise devolves directly into delivery of and payment for the physical commodity, rather than into a futures position.
- Quotation factorThe physical unit a commodity is quoted in on the exchange — Rs per 10 grams for gold, Rs per kilogram for zinc — one of the three inputs that convert a one-tick price move into rupees.
- 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.
- Premium and discount for qualityThe price adjustment when delivered goods differ from the contract's quality specification — a 1:2 discount on castor seed below 47%, and contract rate times 999/995 for .999 gold on a .995 basis.
- Cross currency derivativesIn the exchange traded context, derivatives on a currency pair not involving the Indian rupee — EURUSD, GBPUSD and USDJPY futures and options, introduced from 2018.
- Partial hedgeCovering only a fraction of an exposure with derivatives, leaving the rest open — so the effective rate is a weighted average of the hedged rate and the spot rate.
- Contract specificationsThe terms of an exchange-traded derivative that the exchange fixes in advance — underlying, lot size, contract cycle, expiry day, tick size, settlement prices, trading hours — everything except the price.