Dividend Adjustment in F&O and its impact on PNL Statement

Automatic adjustments are required in F&O contracts for all corporate actions, such as bonus issues, rights offerings, and stock splits. These adjustments affect the strike price of options contracts and the market lot held by investors/traders in the futures market. While adjustments for bonuses and stock splits are relatively straightforward, adjusting for dividend payments in F&O contracts is more complex due to varying definitions of dividends.

The adjustment process depends on whether the declared dividend is classified as an ordinary dividend or an extraordinary dividend. If the dividend is below 2% of the market value of the underlying stock, it is considered an ordinary dividend, and no adjustment is made to the strike price. However, if the dividend exceeds 2% of the market value, the strike price of the F&O contract and the futures price are adjusted.

The market value refers to the closing price of the stock on the day prior to the dividend announcement made by the company after the Board of Directors meeting. If the dividend announcement is made after market hours, the closing price of the same day is used as the market price.

Here is an example to illustrate the adjustment process:
In the case of ITC Ltd, the market price was ₹419.70, and the dividend declared was ₹9.50 per share, equivalent to 2.26% of the market value. Since this exceeds 2%, it is classified as an extraordinary dividend, requiring adjustments in F&O contracts.

Case 1: Suppose you bought ITC Futures at a price of ₹415.50 on 29-05-2023. On EOD of 29-05-2023, your trade would be closed at the closing price, taking into account any mark-to-market gains or losses. Simultaneously, a new trade would be opened at an adjusted price, which is the Closing Price minus the Dividend (₹412.25 - ₹9.50 = ₹402.75). If you sold the shares at ₹420, you would make a profit of ₹22,400. The trades taken by the user are highlighted in green, while the system adds adjustment trades, which are highlighted in yellow. The adjustment trades are reflected in the PNL report as double the net quantity and trade value, but the overall PNL remains the same.

Similar adjustment is also done in the case of a short position too. Consider the below example

Hope that clarifies the confusion of double quantity / more being showing up on the PNL statement.

– Shrimohan Jhawar
Product Operations @ Dhan