Corporate Actions

Impact of bonus (Corporate action) on my F&O positions.

If a contract that you have undergoes a bonus (Corporate action) then the lot size increases and the average price of the future contract decrease.
In case of option contract, the lot size increases, strike price of the contract and the premium decreases based on the adjustment factor.
Adjustment factor will be:- (A + B) / B
Lets have an example here, if the bonus ratio is 2:1, it means people having 1 share will get 2 more shares of the same company. Thus Adjustment Factor is (2+1)/1 = 3
New average price (Futures)= Old average price/adjustment factor
New Lot size = Old lot size * Adjustment factor
New Strike Price (Options) = Old Strike price/adjustment factor

Impact of stock split (Corporate action) on my F&O positions.

Stock split calculation for the F&O contract are handled the same way as bonus issues are handled, where there will be an increase in the lot size and decrease in the average price for futures contracts.
And an increase in the lot size, decrease in strike price and the premium for option contracts based on the adjustment factor.
Adjustment factor will be:- A/B
Let's give an example here if the Split Ratio is 10:2, which means the Face value of the stock will get reduced from Rs. 10 to Rs. 5. In this case the adjustment factor will be 10/2 = 5.
1. New average price (Futures)= Old average price/adjustment factor
2. New Lot size = Old lot size * Adjustment factor
3. New Strike Price (Options) = Old Strike price/adjustment factor

Impact of Dividends (Corporate action) on my F&O positions.

If a company announces a dividend issue of more than 5% of its stock price then this will impact the respective F&O contracts.
The lot size remains the same in both futures and options contracts. Only the buy average for futures reduces by the dividends paid amount and the strike price of the option contracts

Impact of rights issue (Corporate action) on my F&O positions.

In case of rights issue, the futures average price and the lot size will get adjusted based on the adjustment factor released by the exchange.
There will be an increase in the lot size and decrease in the average price for futures contracts.
And an increase in the lot size, decrease in strike price and the premium for option contracts based on the adjustment factor.
New average price (Futures) = Old average price * adjustment factor
New Lot size = Old lot size / Adjustment factor
New Strike Price (Options)= Old Strike price * adjustment factor

What will be the settlement price for the physically settled F&O contracts

Futures contracts will have their own settlement price everyday, and the settlement price of the last day (Expiry day) will be price at which the respective contract will get settled.
And the strike price will act as the settlement price for the options contracts.

What is role of Adjustment Factor in Calculating Corporate Actions for F&O

Adjustment factor helps us to make the necessary adjustment in the F&O contracts, when they undergoes corporate actions, such as Bonus issue, Stock split, Dividends and Rights issues. And the change in lot size and the average price for the futures contracts and the change in lot size, strike price and premium for options contracts will be determined by their adjustment factors.
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12. Precautions for clients dealing in Options

Clients/investors dealing in options, are advised to avoid practices like:

a) Sharing of trading credentials – login id & passwords including OTP's.

b) Trading in leveraged products like options without proper understanding, which could lead to losses.

c) Writing/ selling options or trading in option strategies based on tips, without basic knowledge & understanding of the product and its risks.

d) Dealing in unsolicited tips through Whatsapp, Telegram, YouTube, Facebook, SMS, calls, etc.

e) Trading in “Options” based on recommendations from unauthorised/unregistered investment advisors and influencers.