Operational Guidelines – Contract Cycle, Expiry & Lot Size
1. Introduction
To trade on an exchange, one must understand the operational rules. Unlike the spot market where you just 'buy' or 'sell', the futures market has strict definitions for Quantity (Lot Size) and Time (Expiry).
2. Key Operational Concepts
A. Contract Cycle (Expiry Dates)
At any point in time, there are generally three contracts available for trading in the Indian Derivatives market:
- Near Month (Current Month): The contract expiring this month. (Most liquid).
- Next Month: The contract expiring in the following month.
- Far Month: The contract expiring in the month after that.
- Example: In January, you can see Jan Futures, Feb Futures, and Mar Futures.
B. Expiry Day
- Definition: The last day on which the contract is valid. On this day, all open positions must be settled.
- Rule in India: The Last Thursday of the month is the expiry day for monthly contracts.
- Note: Weekly options expire on different days (e.g., Thursday for Nifty, Wednesday for Bank Nifty).
C. Lot Size (Permitted Lot)
- Meaning: The minimum quantity that can be traded.
- Why?: To prevent very small retail investors from taking high-risk leveraged positions.
- Example: The Lot Size of Nifty 50 is 25 units (as of recent revision). You cannot buy 1 unit or 10 units. You must buy 25, 50, 75, etc.
D. Tick Size
- Meaning: The minimum price difference between two consecutive buy or sell quotes.
- India: The tick size is usually ₹ 0.05 (5 Paise). A price can move from 100.00 to 100.05, not 100.01.
3. Diagram: The 3-Month Cycle
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4. Exam Notes: Writing the Answer
Question: "Write a short note on Contract Cycle and Lot Size." (5 Marks)
Answering Structure:
- Introduction: "Futures trading follows a standardized cycle...".
- Contract Cycle: Detailed explanation of Near, Next, and Far month.
- Expiry: Mention "Last Thursday of the month".
- Lot Size: Define it as "Minimum standard quantity" and give an example (Nifty = 25).
5. Quiz Time! 🎯
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