The term 'Lot', mainly used in the Stock Market refers to the number of shares (units) purchased or sold in a single transaction. It is the number of units of a financial instrument bought on an exchange.
Unlike the Cash market, wherein you pay per share, the derivative market is designed in 'contracts'. In the case of the derivative segment, every contract's quantity is predefined which is known as 'lot size', and the lot size depends on the contract value. These contracts expire after a given period of time. In other words, the contracts are composed of a specific number of shares, which are called ”lots” and ‘lot size’ is the minimum number of shares you have to buy to trade in options or futures. Options and Futures can be traded only in LOTS. The derivative market is designed for hedging, hence the cost-to-carry is low with bigger exposure.
So if you want to trade in derivative products, you pay for the contract. As the exposure is in a specific quantity (i.e. lot size), any price fluctuation will result in your Profit or Loss in multiples.
In options trading, lot size means the total number of contracts in one derivative security. Lot size allows financial markets to regulate price quotes. In Options, lot size includes the no. of share of the underlying stock.
Refer to the below image for practical understanding:
The lot size of RIL has been circled. Since the Reliance Futures are currently quoting at Rs.1331.45, the value of 1 lot of RIL will be (1331.54x 500) Rs. 665,725/-.
Usually, the lot for one options contract is 100 shares. So, If an option contract is of the lot size of 500, meaning that 1 option lot contains 500 shares of the underlying asset.
What does it mean when you say that ‘I bought 1 lot of Options’. Here, one lot in the options contract represents 100 underlying shares of a company's stock. One option contract gives them the right to purchase the lot of 100 shares at the agreed strike price.
If you do not wish to exercise the options, you can also choose to trade them intraday because as the time approaches the expiry date, the option's value will fall. If you don’t want to take more risk, trade in the cash market and buy-sell quantity as per your risk profile
If no lot size is defined, there would be no standard price, valuing and trading of option contracts would be bulky and burdensome. We cannot trade how much quantity we like but we can increase the number of LOTS as the theory of lot size allows financial markets to regulate price quotes.
A small lot size causes a reduction in variability in the system and ensures smooth production. It enhances quality, simplifies scheduling, reduces inventory, and encourages continuous improvement. The lot size of various F&O contracts for a given underlying is always the same.
In the Indian context, the stock exchanges decide the size of the lots and they are revised periodically
One equity option contract represents 100 underlying shares of a company's stock. In other words, the lot for one options contract is 100 shares. For stock options, lots are different for various stocks depending on their share price.
Each instrument has a different lot size. The lot size of an instrument depends on the underlying equity. The smaller is the lot size value, the more is liquidity. The bigger is the lot size, the lesser the liquidity. Lot sizes can be seen on the NSE website with applicable margins.
Remember, the concept of lot size is only applicable to stocks and indices that are included in F&O; not for others. The lot sizes are essentially pegged to the indicative lot values but these lot values keep changing along with the stock price over time. Just as lot sizes are reduced when prices go up, the lot sizes are also increased when prices correct sharply. SEBI routinely revises the lot sizes on the upside and on the downside. Since lot values keep changing in relation to the stock price movements, it becomes essential to shift lot sizes accordingly.