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Revision of F & O contracts - good news for traders and small investors!!

For serious F&O retail traders, I guess this is a good news. NSE has reduced the lot sizes of F&O contracts on most of the cases and increased it in few. This is a long awaited decision since the share prices of scrips have sky-rocketed in the last few months. The original idea of the F&O contracts is that the value of the lot size should be equivalent to INR200,000 and should provide an easy hedging tool for small and retail investors. Totally, the lot sizes of 92 scrips have been brought down and for 14 stocks it has been scaled up. You can view the contract lot sizes of shares which has been revised here.

The contract value is arrived at by multiplying the lot size (number of shares) into the share price. For example, the lot size of Infosys Technologies is 100 shares. The contract value is 100 x Rs1725, resulting in the contract value of Rs172,500.

With the consistent raise in the stock prices, the contract value of many scrips in F&O has crossed the intended Contract Value of Rs200,000. Take the case of BHEL. The present lot size is 300 shares. At the ongoing market rate of Rs2700, the contract size is close to 810,000.

What is the problem with the increased in the contract value? Futures contracts on individual stocks are taken by paying an initial margin and the exchange does a mark to market on a daily basis. Therefore, when the contract value is way beyond Rs200,000 per contract, the initial margin what you pay is very high. Because of that, there is an higher inital outlay and goes out of the reach of retail traders. The new lot sizes are effective Dec 28, 2007.

There are few other things which comes to my mind immediately, for which I have to search for an answer:
1. As I am aware that F&O contracts are available for a maximum of 3 months forward maturity, what would happen to Jan 2008 month contracts which are currently traded in these scrips which have undergone a change in the lot size? How the reduction or increase in lot sizes would be reflected in those contracts? What mechanism the exchange follows in this regard?

Anybody who has information on how these things happen, please feel free to share it.

With the reduction in lot sizes, I would expect that there is more retail participation in F&O. Happy trading!!!

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