On 10 Jun 2026 one lot of Stock A's monthly future, a large bank, held 550 units and was worth Rs 4,06,340. One lot of Stock B's, a large energy and telecom group, held 500 units and was worth Rs 6,31,800. Say a pair rule asks for stock B worth four fifths of what you hold in stock A. With three lots of A it wants Rs 9,75,216 of B, and a lot of B is Rs 6,31,800. You can hold one lot or two, not one and a half. Two lots of B leaves 29.6% too much of it. That lump is the first thing the cointegration maths leaves out. This lesson goes through what an Indian pair trader meets after the test passes: the short, the lots, the roll, delivery, the ban list and costs. All numbers come from dated NSE files, and none is live.
3By the end you can
- Say why the short leg of an Indian retail pair is usually a future and not a cash short.
- Work out the whole lot mismatch of a hedge ratio and the statutory cost of a futures pair.
- List the roll, delivery, ban and margin limits that a paper spread leaves out.
The idea, plainly
Why the legs are futures
A textbook pair is long one stock and short another in the cash market. In India a naked short sale is not permitted: the shares must be delivered at settlement. A retail trader without borrowed shares therefore squares a cash short within the same day. Shares can be borrowed through the exchanges' securities lending and borrowing scheme, which is open to retail accounts too, but lending in most stocks is thin and a lender can recall early. A short future needs no shares and can be carried overnight, so for a retail account both legs of a stock pair are usually stock futures. A cheaper variant is a pair of index futures, such as Nifty against Bank Nifty, which avoids single stock rules but has the shared constituents problem the toolkit module showed.
No overnight cash short, so the short leg is usually a future
Five frictions a paper spread does not show
- Lots. A lot is a fixed number of units, and NSE revises stock lots from time to time, most recently in Mar and Sep 2026. A hedge ratio becomes a choice between whole lots, and a revision can change it mid trade.
- Monthly expiry. Stock futures expire on the last Tuesday of the month. A trade longer than a month is rolled, which is two more trades per leg and a basis that differs between the months.
- Delivery. Stock futures are physically settled. Hold both legs to expiry and the long leg ends in shares received while the short leg ends in shares you must deliver. Pairs are closed or rolled before the last day.
- The ban list. When future equivalent open interest in a stock crosses 95 percent of its market wide position limit, new positions are blocked and only reductions are allowed. A leg in the ban can stop you adding to the pair while the other leg still moves.
- Margin. Each leg carries its own margin. Whether the exchange gives any offset between two different stocks is a question for the clearing corporation's margin documents and your broker's calculator. Do not assume one.
The cost of a round trip, leg by leg
Each leg is bought once and sold once. The statutory charges follow the rates in the cost module. Brokerage is not statutory and comes on top, with the impact of your own orders.
STT: sale value x rate
Stamp: buy value x rate
Exchange: both sides
GST: on the exchange charge
Because a pair has two legs, the statutory charge is paid twice. The cost is a share of the traded value, and it has to be covered before the spread earns anything.
Choosing the legs
The statistics pick pairs from price history. India adds a second filter that has nothing to do with prices. Both stocks need liquid monthly futures, because a thin contract has a wide gap between buy and sell prices, and that gap is paid on each of the four trades of a round trip. Lots should be of similar value, since a pair of one very large lot and one small one rounds badly. And the two companies should have no event that breaks the link: results, a merger, a demerger, a bonus or split. Corporate actions change prices and sometimes lots, and a spread built on the old numbers is then a different spread. A screen can find a pair that fits the history. Only a read of the filings and the exchange circulars tells you whether the future looks like it.
From a hedge ratio to lots
The regression gives a ratio in log terms, which to a first approximation is a ratio of values. To hold lots, convert the ratio to the number of lots of the second stock and round.
Lots of B = ratio x lots of A
x value of A lot
/ value of B lot
Mismatch = lots held
x B lot / wanted - 1
Try every number of lots of A from one to ten and keep the combinations with the smallest mismatch. You will often find that the only good answers are large ones. The smaller account does not get a coarser version of the same trade, it gets a different one.
Worked example: three lots against two
Take the lots of 10 Jun 2026 and the four fifths ratio. The chart shows the mismatch for each choice of lots of A up to six, with the nearest whole lots of B each time.
The ratio never fits: one lot each leaves nearly twice the hedge
Read one more paragraph, 101 words
Only the even lots of A give a small error here, and they need twice the capital. A trader with three lots of A has a choice between 29.6% too much B and 35.2% too little. Either way part of the position is a directional bet on the pair's market, which is what the hedge was meant to remove. The mismatch also moves every day as the two futures prices move, so it is never fixed once and forgotten. The pair lab shows the same lumps for Nifty and Bank Nifty, whose lots were 65 and 30 units on that date.
What the statutory charges come to
Now price three lots of A against two of B, on the same date. The traded value on entry is Rs 24,82,620. The statutory charges for the round trip, before brokerage, are in the chart.
STT is most of the statutory cost of a futures pair
A monthly pair has a calendar: roll before the last day
- Pair opened
Both legs entered. The June contracts have 20 days left.
- Day before expiry
Last day to roll with the calendar spread margin benefit still on for single stock contracts.
- Expiry, last Tuesday
Stock futures settle by delivery. A leg left open ends in shares.
- July contracts only
A rolled pair now carries a new basis on each leg.
Read 2 more paragraphs, 165 words
The total is Rs 1,403, which is 0.115% of the value of the A leg. That sounds small beside a spread that can stretch several percent, and it is. The point is the other side of the ledger. The cost is certain, the reversion is not, and brokerage and slippage are additional. The cost calculator lets you price any leg, and the pair has to clear it on every trade including the ones that go wrong. A pair like the one in the toolkit module, still stretched when its data ended, would have paid the same.
Rolling means closing both June legs and opening both July legs. That is four more trades, and each leg has its own basis, so the roll can add cost or gain by itself. On expiry day the calendar spread margin benefit is not available for an expiring single stock contract, so a roll left to the last session can need more margin than one done a day earlier.
Read the table yourself
Look at the mismatch chart again and write down the ratio at which one lot of each would fit exactly. Then change the assumed ratio in your head to a different round number and see which lot pairs fit. If a trade needs a ratio that has to be rounded by more than a few percent, the unhedged part is a market bet. Next, open the cost calculator, enter the two legs as futures, and check that its total agrees with the chart. The pair lab, linked below, does the same lot table for Nifty and Bank Nifty from the fitted ratio of any split you choose.
Two terms to hold on to from 18.8
The common mistake
The claim: A pair trade is hedged, so it is low risk and works with a small account.
The hedge is only as good as its ratio, and the ratio comes in lots. On the ratio above the nearest whole lots left a mismatch of between about three percent and almost double the hedge, depending on how many lots could be afforded. Each leg then blocks margin. A stock can enter the ban list and stop you adding to one leg. The spread can also keep moving against you, as the Bank Nifty and Nifty example did to its fitted ratio in the toolkit module. Before judging the risk, work out the lots, the margin for both legs, the roll, the ban and the costs, on a paper copy of the trade. The question page gives the short answer.
Key takeaways
- A naked short is not allowed, so pair legs are usually futures.
- A hedge ratio becomes whole lots, and the rounding leaves exposure.
- Stock futures settle by delivery, so pairs close or roll before expiry.
- STT is most of the statutory cost of a futures pair.
- Lots, roll, ban and margin belong in the trade before the test.
The term this section turns on: Roll
Before you trade. Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. Read the SEBI study