Bank Nifty Lot Size Reduced by 40%: Positive or Negative?

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The Nifty Bank Index, an industry index measuring the banking sector, is one of the most traded indices on the NSE. This index is also a favorite of option sellers who like to write options on this index, especially the weekly ones. Most of you are aware that there is a periodic lot size review for securities in the derivatives market that is performed by the exchanges to maintain their contract value. So if a security falls too much during a set period, its lot size is revised up to restore the contract value. Likewise, for a security that increases significantly in a short period of time, the lot size is reduced in the immediate lot size schedule to lower the contract value (contract value = lot size x price). At the last lot size revision, NSE decided to reduce the lot size of Nifty Bank by 40% from the current 25 to just 15 shares. How does this affect your trading and more importantly, is it good or bad?

In my opinion, it has no disadvantages, only positive aspects. First, reducing the lot size leads to a reduction in the overall contract value, which simply results in lower margins. Currently, 1 Bank Nifty Near Month Futures contract requires margin of INR 1,40,000. This is higher than Nifty 50's margin requirement of INR 1,02,000 as there is a big difference between the contract values ​​of both. At the close on Friday, the contract value of Nift 50 was INR 8,67,987 compared to INR 10,15,216 for Bank Nifty.

Obviously, margin fluctuates all the time and depends on several other factors like volatility, but total contract value is the most important factor in how much margin you have to pay. So, after the lot size change, Nifty Banks' margin would decrease noticeably.

Second, lower margins would further increase liquidity. As more traders would be able to trade this index, we could likely see a gradual trend of increasing volume, which is beneficial to all as it reduces the impact cost (difference between bid and ask price). If you leave the current weekly and monthly contracts, subsequent contracts will have less liquidity. Third, a lower contract value also generally reduces risk without traders having to do anything. Where you used to lose 200 points (INR 5,000), the same 200 point action against you now minimizes your loss to INR 3,000. Some traders might complain that this also reduces profit size, which is true, but then multiple contracts can be traded. In summary, lower margins, lower risk and higher liquidity would contribute to a better trading experience. If the lot size is reduced, an increase in the quantity blocking limit is also to be expected.

Now the main question as to when these changes will take place: All monthly contracts expiring in July 2023 will have the changed lot size. The current monthly contracts in April, May and June 2023 will have the existing lot size of 25. All weekly contracts from August 2023 with weekly expiration and beyond will have the revised lot size. The lot size of all existing long-term option contracts (with expiration). longer than 3 months) will be revised after the end of the monthly contract in June 2023.

The securities quoted are for illustration only and are not recommendatory . Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.