Adjustment of Corporate Actions for Stock Option
Summary
This directive mandates a uniform methodology for adjusting Exchange traded Stock Option contracts on the NSE and BSE to handle corporate actions. It establishes that adjustments must preserve the economic value of market participants' positions across cum and ex-dates. The document outlines specific calculation formulas for strike prices, multipliers, and positions for various stock benefits like bonuses and splits.
Text
it has been decided to constitute a group comprising NSE, BSE and other knowledgeable persons, which would decide a uniform course of action for adjusting stock option contracts on corporate actions... certain adjustments for Corporate Actions for Stock Options would be as follows:
The basis for any adjustment for corporate action shall be such that the value of the position of the market participants on cum and ex-date for corporate action shall continue to remain the same as far as possible.
Any adjustment for corporate actions shall be carried out on the last day on which a security is traded on a cum basis in the underlying cash market.
Adjustments shall mean modifications to positions and / or contract specifications as listed below such that the basic premise of adjustment laid down under 1. above is satisfied : Strike Price, Position, Market Lot / Multiplier... The adjustments for corporate actions shall be carried out on all open, exercised as well as assigned positions.
The corporate actions may be broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are : Bonus, Rights, Merger / De-merger, Amalgamation, Splits, Consolidations, Hive-off, Warrants, Secured Premium Notes (SPNs) among others, Extraordinary dividends
Strike Price : The new strike price shall be arrived at by dividing the old strike price by the adjustment factor... Market Lot / Multiplier : The new market lot / multiplier shall be arrived at by multiplying the old market lot by the adjustment factor... Position : The new position shall be arrived at by multiplying the old position by the adjustment factor...
With a view to minimizing fraction settlements, the following methodology is proposed to be adopted : 1. Compute value of the position before adjustment 2. Compute value of the position taking into account the exact adjustment factor 3. Carry out rounding off for the Strike Price and Market Lot 4. Compute value of the position based on the revised strike price and market lot
Dividends which are below 10% 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, above 10% of the market value of the underlying stock, the Strike Price would be adjusted.
The Exchange may on a case to case basis carry out adjustments for other corporate actions as decided by the group in conformity with the above guidelines.
Source: SecMarx — Adjustment of Corporate Actions for Stock Option. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.