InvestorQ : How are options adjusted for cash payment of dividends to shareholders?
Arya Nanda made post
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How are options adjusted for cash payment of dividends to shareholders?

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Nisha Chandani answered.
4 years ago
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Do you need to adjust for dividends because option holders do not receive dividends? Yes, you do and this is how you do it. 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. Here is you need to know about adjustment of dividend impact on options.

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.

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. The revised strike prices would be applicable from the ex-dividend date specified by the exchange.
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