Dear all
Recently I tried a strategy on Coal India. CIL had declared a dividend of Rs 15.25 ex- date of which was 21-Nov-23. I bought 2100 shares of CIL in cash and shorted the Dec-23 futures. I was thinking that since spot price will be adjusted by the dividend amount on the ex date and so will be the futures price. I was hoping to make a profit on the futures leg as the adjusted price will be ( Rs 335) lower than the shorted price (Rs 348). But to my surprise I noticed that the broker or the exchange( I don’t know), squared off my short position on the evening of 20th Nov at Rs 348 and opened a new short position at the adjusted price of Rs 335.
Why this happened? @Shubh69 @nithin please make me understand.
Hi @marcos
These adjustments ensure that the value of market participants’ positions remains as close as possible to the original value on the ex-date of the corporate action.
Adjustments will involve changes in the base price, option strike values, and the market lot, depending on the adjustment factor. In some cases, adjustments may also result in the modification of the contract’s expiry date, where the contract will be force closed before the original expiry date, and adjusted contracts will be introduced for trading instead.
Lets take the example of Coal India:
Adjustment for future contracts:
All positions in futures contracts of COALINDIA will be marked-to-market on the last cum-dividend date i.e. November 20th, 2023, based on the daily settlement price of the respective futures contract. Subsequently, open positions will be carried forward at the daily settlement price less Rs. 15.25 (dividend amount) for the respective futures contract.
From November 21st, 2023 (ex-dividend date), daily mark-to-market settlement of the futures contracts will continue as per normal procedures.
For example:
Assume you shorted 1 lot (2100 quantities) of COALINDIA futures on November 20th, 2023, at Rs. 350, and the daily settlement price at the market close is Rs. 345, you would have made a mark-to-market profit of Rs. 5 per share.
On November 21st, 2023, the previous day’s position will be carried forward at Rs. 334.75 (i.e. 350 – 15.25). If the closing price on November 21st, 2023, is Rs. 330, you’ll make a mark-to-market profit of Rs. 4.75 per share.
You can read more about the recent adjustment in Coal India in the below post and also keep a track of all the upcoming corporate adjustment by checking out our bulletin:
It means no profit making opportunity exists in such scenario. I was thinking of capturing the fall in price of the futures.
Thanks.
Generally, there is very little to minuscule possibility of big arbitrage gains in regular corporate adjustments as most of the market participants would be aware of the price adjustment.