Commodities lot size
In commodity trading, accuracy is the key to making a profit. Unlike equity markets, where market participants can buy one share of stock, commodities are traded in standardised quantities, which is known as a lot size. Understanding the Commodities lot size is the first step to effective risk management and capital allocation.
What does a lot size mean?
A lot size is the pre-determined, standardised contract quantity of a commodity that can be bought or sold in a single contract (futures or options). These standardised quantities help facilitate uniformity and liquidity in the market and thus aid in facilitating trading for the market participants.
Lot sizes are fixed by the commodity exchanges(MCX, NCDEX) to make trading processes easy and to build a standard framework for trading. Since commodities are physical goods, they are measured in standard units like Kilograms (Kg), Grams (gm), Barrels (BBL) or Metric Tonnes (MT).
For example:
Gold Standard:1 Lot = 1 Kilogram
Crude Oil: 1 Lot = 100 Barrels
Silver: 1 Lot = 30 Kilograms
Natural gas: 1 Lot = 1250 MMBtu
Copper: 1 Lot = 2500 Kilograms
How is the commodities lot size tool useful?
The all commodities lot size feature on Dhan helps traders with:
Trade sizing:For traders with smaller capital, the various commodity lot sizes help to provide smaller lot sizes to make high-value commodities accessible. For example, traders seeking to buy gold contracts can buy gold mini contracts of 100 g instead of 1 kg contracts of gold.
Risk management: It enables traders to calculate their overall exposure. The larger the lot size, the higher the financial commitment and the greater the potential for profit or loss.
Accurate position sizing: It aids traders in knowing the exact amount of a commodity they are dealing with, which facilitates accurate risk management and capital allocation.
Profit and loss calculation: Understanding the lot size is essential to calculating potential profit or loss based on price fluctuations.
Strategy Development: Understanding lot sizes can help traders optimise their trading strategies by taking into account the monetary impact of each price fluctuation.
Understanding tick size for all Commodities
The tick size in commodity trading is the minimum price fluctuation or movement that a commodity contract can experience. It's the smallest amount of change that the price of a commodity can experience.
For example, for gold, the tick size is Rs. 1 per gram, while for crude oil, the tick size is Rs. 1 per barrel. For others, such as Natural Gas, it is Rs. 0.10 (10 paise). Understanding tick size is important as it directly affects the profit and loss calculations, as well as the granularity of the price movements that traders can capitalise on.
How is P&L calculated based on the tick size?
Calculating Profit & Loss (P&L) in commodities trading relies on both the lot size and the tick size. The formula for calculating the P&L for a single tick movement is:
Calculate the value of one tick:
Tick Value = Lot Size x Tick Size
For example, for Crude Oil (100 Barrels) and a tick size of ₹ 1
100 x 1 = ₹100 per tick
Calculate total P&L:
Total P&L = (Total Ticks Moved) x (Tick Value) x (Number of Lots)
Example: If you buy 1 lot of Crude Oil and it goes up by 10 points (10 ticks)
10 ticks x ₹100 x 1 lot = ₹1,000 Profit
This calculation is useful for traders to quickly evaluate the monetary effect of even small changes in price and is important for risk assessment and determining stop loss and target levels.Is it possible to change the lot sizes?
No, individual traders cannot alter the lot size of a contract. Lot sizes are strictly standardised and defined by the exchange under SEBI’s regulatory framework. However, traders can control their overall exposure in two ways:
Multiple lots: If they have high conviction and capital, they can buy/sell multiple lots (e.g. 5 lots of Gold Mini).
Contract variants: If a Main lot size is too big for the risk appetite of traders, they can go for Mini or Micro variants of the same commodity.
Wrapping it up
Commodity markets are best navigated with a strong understanding of these structural basics. Understanding the relationship between the lot size and the tick values can help traders transition from speculative trading to informed trading. Be it hedging inflation or tracking energy trends, the commodities lot size tool on Dhan helps traders trade with conviction.
Dhan App
Chrome
