Short Futures - Before dividend declaration

We all know that a Stock value falls when dividend is declared. Assume I’m tracking a stock which is giving out dividends every year. Can I short the futures of the stock before the dividend is declared and make money when futures falls?

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This works in theory but in reality this depends on the dividend itself.

For example - The most recent that I can think of - Piramal Enterprises (PEL) declared a interim dividend of 54/- this was actually a little more than what the investors had expected and hence the stock price actually went up because of the positive sentiment.

Like wise for other corporate actions as well.

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Stock value doesn’t fall when dividend is declared but it falls when stock goes ex-dividend. Even then it may not fall as much as dividend and sometimes it may not fall at all.

Regarding shorting futures there are several things one need to keep in mind -

  • Liquidity Risk,

  • Bid-Ask spread Risk.

  • Futures price might already reflect the dividend changes much before the ex-div date and hence futures price may not fall even though underlying stock corrects.

Best way to find out would be to Back Test it.

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Typically how it plays out is that when dividend is declared on any F&O stock(matter of fact, any stock), the day it is declared or the next, the value of the stock goes up by around the dividend amount.

So if a stock at Rs 100 declares Rs 3/share as dividend, the stock value goes up to 103. On the ex-dividend date (the day the dividend is credited to the stock holders bank account), the value of the stock drops by the same amount. But do understand that there are exceptions.

There are many, not knowledgeable retail who go buy a stock after a dividend is declared, thinking that they will be getting free money, what they don’t realize is that once the dividend is declared and they are trying to buy the stock, they are actually paying more for the stock (which includes dividend itself). Yes they get the dividend credited to the bank account, but the value of the stock drops and hence there is no real play in at all. The only benefit here is that dividends in India are tax free, so whatever is credited to your bank doesn’t have any taxes to be paid.

Coming back to the main question, so the day the dividend is declared stock price goes to 103, but futures remain as it is at 100 (since the holders of futures don’t make any dividends). Assuming the stock is going ex-dividend tomorrow and todays closing price of the stock is 105 and futures is 102, the next day morning the value of stock drops by Rs 3 to 102 and your future remains at 102.

So, no you cannot short the futures and hope to catch the dividends, because the futures value would never go up when dividend is declared and never come down on the ex-dividend date.

(Even if the value of stock doesn’t go up when dividend is announced, by the time stock goes ex-dividend the future will already be trading at a discount, so you cannot really profit by shorting futures expecting the price to drop on ex-dividend date.)

Hopefully clarifies.

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So ex dividend date, the stock price will fall by 54? If futures follow spot, the price of future also falls? Does it mean I can short from before and keep it and make confirmed profit?

@Sameer
I think Futures wont follow spot in such a case, that is what they are trying to explain in all these posts. Futures will already be close to Spot - 54. I hope you got the point.

Above answer says that "The only benefit here is that dividends in India are tax free, so whatever is credited to your bank doesn’t have any taxes to be paid."
In case of dividend stripping, you need to pay income tax on dividend if the security is sold within 3 months of buying. Usual income-tax rates apply.

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Just a small correction I would like to point out… Ex dividend date is not the date when div. Is credited to ur bank account but its a date before which if u buy shares in delivery then u are eligible to a dividend when thats declared by Directors in case of Interim div or declared by sharesholders in case of final dividend…
That also implies if u sell shares on or after ex dividend date… U r still eligible for a dividend when declared by Board or members…

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what a superb explanation

@ShubhS9 @siva-reddy

Since the stock price usually falls by the amount thats declared in the dividend amount, does the buy price in kite also needs to be adjusted after dividend has been declared and credited to reflect actual buy price?

Gail Strike price got change from 120pe feb to 113.6pe refer this thread once, there is a rule of changing the underlying spot price (and subsequent strike prices) in FNO segment if the dividend is big enough

Hey @Shubhanshu_Sharma,
Thanks for responding. I have read that article, but that doesn’t answer my question.

My question is

1. “Will the actual buy price of the stock that I purchased be reduced in KITE/Console when the stock dividend is declared
and
2. does this reduction happen automatically in KITE/Console or should we raise any support ticket for that

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Hi @ShubhS9,
Request your thoughts on my above query…

Dividend doesn’t change buy price of the stock.

You don’t have to take any action at your end to make any adjustments arising due to corporate actions.

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Hey @sudheer_kumar
First of all the underlying stock generally moves up when the dividend is declared and moves down once the stock goes ex dividend. There is no rule saying that this will definitely happen.
The anticipation of a big dividend may already factor in a big dividend getting declared and when the actual dividend is announced the stock price may not move up. Similarly there is no guarantee that the stock will move down once the stock goes ex - dividend. For one if the dividend percentage is too low (say 1% -1.5%) what can happen on the ex date you cannot say it might move down by the exact amount of 1.5 % , maybe it moves down by 1% or 3% or moves up by 2% , the point being on the date of ex-dividend other factors can come into play. As the the dividend declared increases (talking about effective yield) the chances of stock price going down on ex-date increases (they are still just probability, nothing is fixed) and beyond 5% as already mentioned in the other thread the concept of extra ordinary dividend kicks in and the exchange changes the strike price of F&O contracts to compensate for the price falling due to ex-date of dividends.
So for you to actually benefit from shorting a stock going ex-dividend first thing is it has to have FnO trading as that is the only way to short in India, second to increase the chances of stock moving down after ex-dividend the dividend declared has to be significant (but less than 5% otherwise the rule of extra ordinary dividend kicks in). And as already mentioned nothing is set in stone on the day of ex-dividend the company can announce some other news or some event occurs that shoots its price up, thus incurring you losses in your short position.
All the movement of stock price I talked about is naturally occurring its not like NSE/BSE increases the stock price after dividend announcement and decreases it on ex-dividend date. It happens because people want to capture the dividend after the announcement so they are willing to pay more to buy it, and it moves down because shareholders have already captured that dividend and are ready to sell it for a cheaper price and so the price moves down

Hello Nithin Sir,

I have one question which just shook me in one of my encounters.

Today dated 22/03/2021 - Monday – NMDC Spot Price : 133 approx. Declared an Ex Div of Rs 7.76

Considering Few days to Expiry, I took some OTM SELL Positions on both sides just to bag the decay.

SOLD 140 CE and 125 PE on the Friday .i.e. 19/03/2021

Monday before the market opening all my CE positions literally became ITM and in my portfolio the expected Loss Became Huge…

Although in the Pre-Opening NMDC opened at around 128 and I felt Lucky. I would request you to please help understand how this works and in case let’s assume it would have opened around 140 then I would have lost some good money.

Once again, another learning but a Happy one however I would want to know from you how to handle these situations in future.

Should I wait for the next day for the price adjustment? Will the Price of Options be same as Future you described in your explanation?

Request your kind guidance.

Regards,
Suvajit

Today the stock has gone up, can check below screenshot, BSE adjusts the price for extra ordinary dividend where as NSE doesn’t.
image

Can check this once and for more queries you can ask on varsity or here.

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There potentially could be stray ticks in the premarket opening, this is the time when price discovery typically happens and hence you might see prices way up or below the actual price. You can check out the details here

NSE started the concept of pre-open session a few months back to minimize the volatility of securities during the market opening every day. Between 9:00 AM to 9:15 AM is when the pre-market session is conducted on NSE. During the pre-market session for the first 8 minutes (between 9:00 AM and 9:08 AM) orders are collected, modified or cancelled. You can place limit orders/market orders. After 9.08 AM to 9.15 AM no new orders can be placed, orders placed are matched and trades confirmed. So technically you can place orders only for the first 8 minutes and only on equity segment. More on Pre-market orders on this link.

Yeah, the price of options will typically follow the futures.

Thank you very much however I couldnt get what generally happens? If the Div is Declared, then is the adjustment made by “Deducting or Adding”? So if the share is trading at 100 and gave a div of 5 Rs. Then will the next day Spot Price be adjusted to 105 or 95?

Because the Options and Future Prices got slashed by 5 Rs.

Another interesting point which you highlighted on the BSE and NSE prices, why was the adjustment didnt happen in NSE and our Future and Options does consider the NSE Price as SPOT Price right?

Regards,
Suvajit

Thank you Nithin I will understand more about the Pre-market and Post Market how things happens however my query was more from the Price adjustment Perspective.

Like in My case all my OTM calls became ITM and if assume the Stock would have moved up by 5% from the Previous close then i think i would lost a great deal of amount.

My question is if the Options of Future Prices are adjusted then shouldn’t the Spot be also revised? I mean shouldn’t we be seeing at 8AM .i.e. before pre-opening then price of NMDC around 133-7 = 126 approx?

Regards,
Suvajit