@ShubhS9 Does the holder of ‘Futures’ or a ‘Call Option’ incur a loss in case a company declares dividend
No, F&O traders don’t suffer any losses. There is similar post to your query, would suggest you check it out:
This page on the NSE website explains how adjustments are made to derivative contracts when dividends are declared -
i. a. Dividends which are below 5% of the market value of the underlying stock, would be deemed to be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends. For extra-ordinary dividends, which are at and above 5% of the market value of the underlying security, the Strike Price would be adjusted.
b. All cases of dividends, where the listed entity has sought exemption from the timeline prescribed under the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
ii. To decide whether the dividend is “extra-ordinary” (i.e. which are at and above 5% of the market price of the underlying stock.), the market price would mean the closing price of the scrip on the day previous to the date on which the announcement of the dividend is made by the Company after the meeting of the Board of Directors. However, in cases where the announcement of dividend is made after the close of market hours, the same day’s closing price would be taken as the market price. Further, if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors, then to decide whether the dividend is extra-ordinary or not would be based on the rate of dividend communicated to the exchange after AGM and the closing price of the scrip on the day previous to the date of the AGM.
iii. In case of declaration of “extra-ordinary” dividend by any company, the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock.
iv. The revised strike prices would be applicable from the ex-dividend date specified by the exchange.
Also sometimes, futures start trading at a discount even before the dividend is actually declared as the market expectations factor in the dividend that is likely to declared by the company. Like for example, check this news byte from last year (starts 3:11), which talks about how the futures were trading at a discount even before Coal India announced its dividend. Also, check this article -
I just wanted to understand how 5% is calculated to decide ordinary or extraordinary dividend. Lets say if ITC closing price on the previous day of dividend announcement is Rs. 200. Now if dividend is more than 10 rupees(so calculation is (10/200)*100 = 5%), only then it is extraordinary and F&O price gets adjusted automatically on ex-date. If dividend is less than 10, then there will be no price adjustments on F&O right ?
Say I had a short future position with average rate as 100 and the dividend declared is Rs.10, will Zerodha automatically reduce my sell rate from Rs.100 to Rs.90 in case the exchange reduces the same.
Since February 2022 Any dividend which is 2% ( not 5%) or more than closing price of exchange where the share has traded max , on the day of declaration /approval is called extra ordinary dividend .
in case of Interim dividend closing price on the day of board declaration is enough wherein in case of final dividend it is agm approval date is barometer to qualify if it is 2% or more.
The adjustment is done by the exchange on the ex-date, not on the day dividend is declared. Earlier adjustments used to happen if a dividend declared is 5% or greater than the CMP, since February 2022, this has been revised to 2%.
You can check out how the adjustment is carried out here: Adjustments in F&O contracts of Vedanta Ltd. on account of extraordinary dividend