Smaller F&O contract size to fuel volatility

The reduction in the size of futures and options (F&O) contracts on the National Stock Exchange is expected to further increase volatility in the market as new contracts have become affordable to smaller players.

According to derivatives strategists, the reduced contract lots will help smaller operators to arbitrage, hedge or speculate.

Ashok Mittal, head of derivative with SSKI said, "The reduced lots will definitely attract new players to the F&O segment but in the short term their could be slight reduction in the volumes."

As per the recent directive from the Securities and Exchange Board of India (Sebi), the National Stock Exchange has reduced the lot size of contracts with effect from today.

According to the directive, the lot size has been halved for any stock whose earlier contract value was between Rs 4 lakh and Rs 8 lakh, and is reduced to one-fourth if the value is above Rs 8 lakh.

As a result, each contract of Tata Motors, for instance, will have a lot size of 825 shares against the earlier 3,300 shares.

Similarly, the lot size of other shares will be adjusted according to the market value. However, in the case of HLL and Mastek, the lot size will be increased from June contracts.

The HLL lot will be increased to 2000 shares from the existing 1000 shares, while Mastek lot will be increased to 1600 shares from the existing 400 shares.

A leading BSE broker said, "A reduction in the lost size will definitely attract smaller players and will also help the BSE' F&O segment which is lagging behind in terms of daily turnover compared to the NSE. The NSE today posted a turnover of Rs 13,000 crore.