If I short sell future of a stock and stock is going to give Rs 8/- as dividend next day then stock prise will be adjusted by Rs 8/- so can I say that because of this adjustment future’s price will correct and I will hv almost 8 point profit from my short position???Plz put some light on this
The price of future will already be discounted so no point.
That’s not how it works.
If any company announces extraordinary dividend (>2% of the CMP), on the ex-date, the F&O contracts are adjusted according to the adjustment factor. More on this here:
given how often this question is asked, maybe you should consider pinning it
how naive are market makers
If you’re holding a short future position, you will generally be at a loss.
Take the example of the TCS extra-ordinary dividend case (Rs. 75 per share) with ex-date 16-Jan-2023:
Below are the TCS JAN Future closing prices:
On ex-date, Futures Base Price: Reference Rate - Adjustment Factor, i.e. 3387.85 - 75 = 3312.85
This means on 13th Jan, your short TCS is exited at 3387.85, and on 16th Jan (ex-date), the fresh short position is created at 3312.85 (base price) due to adjustment. With this, you’re at a loss since the closing price is higher (3337.80) even when the day is in your favor (bearish view):
- MTM of Short TCS JAN FUT on 16-Jan-2023 = (13th Closing - 16th Closing) - Extraordinary Dividends = (3387.85 - 3337.80) - 75 = Loss of 24.95 points
- MTM of Short TCS JAN FUT on 16-Jan-2023 = (13th Closing - Adjustment Factor) - 16th Closing = (3387.85 - 75) - 3337.80 = Loss of 24.95 points