Underlyings, Lot Sizes & Expiry

beginner6 min read

The basic plumbing: what a contract is written on, how big it is, and when it dies.

Before trading any derivative, you must understand three pieces of standardised plumbing that define every contract: what it’s written on (the underlying), how big it is (the lot size), and when it stops existing (the expiry).

Underlying — the asset the contract derives value from (e.g. Nifty, Bank Nifty, or a specific stock like Reliance).
Lot size — derivatives trade in fixed bundles, not single units. You can’t buy “1 Nifty future”; you buy one lot, which represents a set quantity of the underlying.
Expiry — every derivative has a death date. After expiry the contract ceases to exist and is settled. Indian index options now expire weekly; stock derivatives typically monthly.

The two facts that catch beginners off guard are *lot size and expiry* — because together they mean a derivative is both bigger and more time-limited than it looks. Lot size silently magnifies your exposure: one “cheap-looking” option is really a bet on a large bundle of the underlying, so your real position is far larger than the premium suggests. And expiry adds a ticking clock a stock never has — a stock can be held forever, but a derivative must resolve by its expiry date, win or lose. You’re always trading a sized bet against a deadline.

ExampleSay the Nifty lot size is 50 and the Nifty is at 22,000. One futures lot controls 50 × 22,000 = ₹11,00,000 of exposure — even though your margin to hold it is a fraction of that. A beginner who thinks “it’s just one contract” is actually controlling over ₹11 lakh of the index, on a contract that expires on a fixed date.

Key takeawayEvery derivative is defined by its underlying (what it tracks), lot size (the fixed bundle you must trade — which magnifies real exposure), and expiry (the death date by which it must settle). A derivative is always a sized position against a deadline.

FAQs

Why do derivatives have lot sizes instead of single units?

Standardisation — fixed lot sizes make contracts uniform and liquid, so any buyer and seller are trading identical units. The exchange sets and periodically revises lot sizes (often targeting a minimum contract value). The catch for beginners is that one lot can represent a large rupee exposure, so always compute what a single lot actually controls.