Adjustment of Futures and Options contracts in ITC Limited

If a company declares extra-ordinary dividend (i.e. greater than 5% of the price of the shares), the F&O contracts are adjusted by the exchange to incorporate the effect. In other words, the dividend amount is reduced from the price of futures and strike price of the options on the ex-date.

Check this circular from NSE on the adjustment of F&O contracts in ITC on the ex-date which is July 6th, 2020.

Adjustments for Futures Contracts:
Base price of the Futures contracts on July 06, 2020 will be reference rate less aggregate amount of
dividend i.e. Rs. 10.15/-. The reference rate to be reckoned for this purpose shall be the daily mark to
market settlement price of the relevant futures contract.

Assume you buy one lot of ITC futures on July 5th at Rs 205. The closing price for the day is Rs 208. In this case, you have made Rs 3 marked-to-market profit. On July 6th, the base price will be reduced to Rs 197.85 (i.e. 208 - 10.15). If the closing price is Rs 198 on that day then you have made a Rs 0.15 marked-to-market profit.

What this means is that the futures won’t trade at a discount to the spot price like when there is a normal dividend announced. On ex-dividend date, the futures price will be reduced by Rs 10.15.

Adjustments for Options Contracts:
The full value of dividend i.e. Rs. 10.15/- would be deducted from all the cum-dividend strike prices
on the ex-dividend date. The details of the old and corresponding new options contracts that shall be
available for trading from July 06, 2020 would be notified on July 03, 2020

For instance, the strike price of Rs 200 call option will be reduced to Rs 189.85 (i.e. 200 - 10.15) on July 6th.

The lot size of the F&O contracts will not change. Also, if you hold equity shares of ITC in your demat account as on July 5th, you will be entitled to receive the dividend. The equity share price should theoretically reduce by Rs 10.15 on July 6th.

5 Likes

Why is the futures price and spot price same for ITC even though there is a dividend of 10.15 rupees declared . ? Can one go long in cash and short futures? Just to gain the dividend cash?

Also to get the dividend I can sell anytime after record date to get the dividend?

Ex Dividend date in 6 July, so there is still time for Spot and Futures to diverge from each other. Even if they don’t, on Ex Dividend date when stock’s value falls by 10.15, Futures price may remain intact.

Yes.

But again if the position is kept active till month end both spot and futures have to contract at the same price ? Even though they don’t converge on record date?

This is an interesting play in ITC TBH.

So my position is 6400 shares long at 197 bought 200 pe @10 2 lots and sold 200 ce @7 2 lots and planning to trap the dividend. Hope my math is right assuming the position is active till expiry

Do you think ITC price will fall back to below 200 after the dividend? Since their Hotel business and stationary business are currently affected.

I bought ITC @ 208 last February. I like to hold for a long term. But if it is going to fall, its better to sell some of it now.

Dividend is more than 5% . All F&O positions will be adjusted after ex dividend date
https://www.nseindia.com/products-services/equity-derivatives-corporate-actions-adjustments

Bro, I’m not an analyst. I’m of the belief that one should make his own decisions and responsibly accept the outcome.

So if you sell on ex dividend date …u can still get the dividend correct?

Yes.

Just updated in the post above

What this means is that the futures won’t trade at a discount to the spot price like when there is a normal dividend announced. On ex-dividend date, the futures price will be reduced by Rs 10.15.

If you go long and short futures, you will gain nothing as both cash and futures will drop by Rs 10.15 on July 6th.

what if we sell ITC fut and cover when it goes ex dividend ~10 rs lower. What is the catch in that ?

ITC Futures price isn’t going to fall by 10 on ex-dividend date, as mentioned above value of Futures will be reduced by 10.

So in case of ITC price will be about 10 Rs. less on July 6 2020/ Monday?

Yes, less by 10.15. When stock goes ex-dividend it’s price falls relative to dividends paid.

But next day it may go up correct?

It may, It may not.

What are you worried about? If you hold ITC on ex-dividend date you are going to get 10.15 in your bank account without selling single share. This isn’t profitable by any means but you aren’t making loss either.

Does anyone know when ITC dividend will be paid after record date

Dividend pay-out date is 8th September.