Corporate-action adjustments on F&O contracts

A corporate-action adjustment on a futures and options (F&O) contract is the mechanical revision that NSE Clearing Limited, the clearing corporation of the National Stock Exchange and a SEBI-regulated entity, applies to the strike price, the futures base price and the market lot of every open derivatives contract on a stock when the underlying company carries out a stock split, bonus issue, extraordinary dividend, rights issue, merger or demerger. The adjustment is value-neutral by design: it changes the contract’s numbers so that the rupee value of every open position is identical the moment before and the moment after, with no forced closure of any position.

This matters because a trader who holds a futures or option position across a corporate action will open the Kite terminal the next morning to find a different strike price, sometimes a different lot size, and a different quoted premium, even though nothing about their economic exposure has changed. The single number that drives all of this is the adjustment factor, a ratio NSE computes from the terms of the corporate action. This article sets out how NSE derives that factor for each action type, how it flows through to strikes, lots and positions, the 2 per cent threshold that separates an ordinary dividend from an extraordinary one, the cum and ex-date timing that fixes when the change lands, and what the trader actually sees in their account.

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission from anything described here.

The adjustment factor

Every F&O corporate-action adjustment on NSE runs through one number. NSE Clearing computes an adjustment factor from the ratio of the corporate action, then applies it the same way to the futures price, to all strike prices, and to the market lot. The arithmetic is simple once the factor is fixed.

NSE applies the factor as follows. The futures base price becomes the old futures price divided by the adjustment factor. Each strike price becomes the old strike divided by the factor, and every strike on the chain moves together. The market lot, also called the multiplier, becomes the old market lot multiplied by the factor. Dividing the price and multiplying the quantity by the same number leaves price times quantity unchanged, which is why the position value does not move.

The factor itself is derived differently for each action type, and the rest of this article works through each one. Where two actions occur together, a bonus and a split announced as a single corporate action, NSE multiplies the two factors. A 1:1 bonus (factor 2) combined with a 1:1 split (factor 2) gives a combined factor of 4, so a market lot of 125 becomes 500, that is 125 multiplied by 4.

Stock splits

A stock split increases the number of shares by cutting the face value of each share, so the share price falls in proportion while the company’s total value is unchanged. Companies split to bring a high nominal price down to a more liquid level.

For a split in ratio A:B, the adjustment factor is A divided by B. In a 5:1 split, where one share of face value Rs 10 becomes five shares of face value Rs 2, the factor is 5. NSE then divides the futures price and every strike by 5 and multiplies the market lot by 5. A futures contract quoting Rs 1,000 becomes a contract quoting Rs 200; a 1,000 call becomes a 200 call; a market lot of 100 becomes 500. A trader long one futures lot before the split is long one futures lot after it, at one-fifth the price and five times the quantity, for the identical rupee exposure.

Bonus issues

A bonus issue gives existing shareholders additional shares free, capitalising the company’s reserves. It dilutes the per-share price the same way a split does, so the F&O treatment is similar but the factor is computed differently because a bonus is expressed against the existing holding rather than against a face value.

For a bonus in ratio A:B, the adjustment factor is (A plus B) divided by B. A 1:1 bonus, one free share for each share held, gives a factor of (1 plus 1) divided by 1, which is 2. NSE halves the futures price and every strike and doubles the market lot. A 3:2 bonus, three free shares for every two held, gives a factor of (3 plus 2) divided by 2, which is 2.5. The mechanism is the same as a split once the factor is known; only the formula that produces the factor differs.

Dividends: ordinary versus extraordinary

Dividends are the case where most traders are caught out, because not every dividend changes the contract, and the one that does is adjusted by a flat rupee deduction rather than by the divide-and-multiply factor.

NSE splits dividends into two classes by size, measured against the underlying’s market value. A dividend below 2 per cent of the market value of the underlying stock is treated as an ordinary dividend, and no strike-price adjustment is made for it. The premium of the option absorbs the small, expected price drop on the ex-date through normal market pricing; the contract numbers are left alone. A dividend above 2 per cent of the market value is an extraordinary dividend, and the strike prices are adjusted.

To decide whether a dividend is extraordinary, NSE takes the market price as the closing price of the scrip on the day before the date on which the company’s board announces the dividend. Where the announcement is made after market hours, that same day’s close is used. Once a dividend is classified as extraordinary, the total dividend amount, special and ordinary combined, is deducted from all strike prices of the option contracts on the stock, on the ex-dividend date. The lot size does not change for a dividend adjustment.

NSE’s own worked example is the ITC dividend adjustment. The full dividend value, Rs 6.50, is deducted from every cum-dividend strike on the ex-dividend date. A 325 call becomes a 318.50 call, and the position in the 325 call continues to exist, unchanged in quantity, in the 318.50 call. A 320 put becomes a 313.50 put on the same basis. Every strike on the chain moves down by Rs 6.50, the futures price is adjusted by the dividend, and the lot size of the F&O contracts does not change.

Source: NSE F&O corporate-actions adjustment framework and the NSE ITC dividend worked example, as set out on the NSE Clearing corporate-actions page.

Rights issues

A rights issue lets existing shareholders buy new shares at a fixed price, usually below market, in proportion to their holding. Because the new shares come in at a discount, a rights issue dilutes the share price, but the adjustment direction for the strike is the reverse of a split or bonus.

For a rights issue, the new strike price is arrived at by multiplying the old strike by the adjustment factor, where the factor reflects the discounted rights price and the subscription ratio. This is the opposite of the divide-by-factor treatment used for splits and bonuses, and it follows from how a rights issue dilutes value relative to the cum-rights price. The futures price and the lot size are adjusted in the same operation so that the position value is preserved.

Mergers and demergers

Mergers are handled differently from every action above, because a merging company stops existing as an independent underlying, so there is nothing to carry the adjusted contract forward.

In a merger, contracts are settled, not adjusted. After F&O is introduced on the underlying that will cease to exist on merger, the un-expired contracts outstanding on the last cum-date are compulsorily settled at the settlement price, which is the closing price of the underlying on the last cum-date. The trader’s position is closed at that price and the proceeds or obligations are credited or debited. Any new derivatives exposure to the merged or surviving entity has to be taken afresh in that entity’s own contracts. A demerger, where one company splits off a business into a separate listed entity, is adjusted through a factor computed from the demerger ratio and the relative values of the resulting entities, so that the combined value of the resulting positions matches the pre-demerger position.

Cum and ex-date timing

The timing rule fixes the exact moment a contract changes, and it is the same logic across action types. Any adjustment for a corporate action is carried out on the last day the security trades on a cum basis in the underlying equities market, after the close of trading hours. The revised contracts then apply from the next trading day, the ex-date.

The cum-date is the last day a buyer of the share is entitled to the corporate action; the ex-date is the first day the share trades without that entitlement, which is why the cash price itself drops on the ex-date for a split, bonus or large dividend. For dividends specifically, the revised strike prices are applicable from the ex-dividend date specified by the exchange. A trader holding a position into the close of the cum-date carries it across; the next morning the contract carries its new numbers. There is no window in which the position is forcibly squared off for the adjustment.

Handling fractions

Adjustment factors do not always produce whole numbers for the strike and the lot, so NSE follows a defined rounding procedure to avoid fractional settlements while still leaving no trader worse off.

NSE adopts a four-step method to minimise fraction settlements. First, it computes the value of the position before adjustment. Second, it computes the value of the position using the exact adjustment factor. Third, it rounds off the strike price and the market lot. Fourth, it computes the value of the position based on the revised, rounded strike and lot. Any difference between the first step and the fourth step is decided by the relevant authority by adjusting either the strike price or the market lot, so that no forced closure of an open position is mandated. The trader does not have to act; the clearing corporation absorbs the rounding into the contract terms.

What the trader sees in Kite

For a Zerodha client, the adjustment is automatic and visible the next morning. The old strike disappears from the position and the revised strike takes its place, carrying the same quantity and the same open position. A 325 call held into an ITC ex-dividend date shows as a 318.50 call afterwards, with the position intact. After a 5:1 split, a single futures lot shows at one-fifth the price and the lot quantity shows at five times the old size. The mark-to-market is continuous across the change because the value is preserved.

The premium quote will look different, which unsettles traders who do not know an action has occurred. A call that traded at Rs 12 on a 325 strike does not become a call at Rs 12 on a 318.50 strike; the premium itself is repriced by the market on the ex-date around the new, lower cash price, and the strike has moved with it. Zerodha surfaces the action through its bulletins and the console corporate-actions record, and the Kite chart corporate-actions overlay marks the ex-date on the price chart. The Zerodha corporate-action charges page covers the cash-side handling for delivery holdings; for F&O the adjustment itself carries no charge. The one thing a trader should check is the revised lot size, because a position that looks larger in quantity after a split or bonus has not grown in value, and a fresh order placed without noticing the new lot can be sized wrongly.

How this connects to expiry and settlement

A corporate-action adjustment changes the contract but not the segment’s other expiry rules. The adjusted contract still expires on its normal expiry date, is still subject to the physical settlement of stock F&O for single-stock contracts held to expiry, and still carries the SPAN margin on Zerodha and exposure margin on Zerodha on the revised position. A trader rolling a position across an action should use the how to rollover an F&O position on Zerodha flow on the adjusted contract, not on a stale pre-action strike. The F&O taxation in India treatment is unaffected by the adjustment, since no taxable event occurs when a contract is merely re-expressed in new numbers; a taxable gain or loss arises only when the position is actually closed.

See also

• National Stock Exchange
• NSE Clearing
• NSE Clearing Limited
• Bombay Stock Exchange
• Futures and options
• Zerodha F&O segment
• Physical settlement of stock F&O
• Expiry-day options trading
• How to rollover an F&O position on Zerodha
• How to read option Greeks on Kite
• SPAN margin on Zerodha
• Exposure margin on Zerodha
• F&O taxation in India
• Securities Transaction Tax
• Lot size revision in F&O 2024
• Console corporate actions
• Zerodha corporate-action charges
• Kite chart corporate-actions overlay
• Rights issue
• Bank Nifty
• NIFTY 50
• Sensex
• SEBI
• Kite by Zerodha
• Zerodha
• ICCL
• How to trade futures on Kite (first time)
• How to trade options on Kite (first time)

External references

• NSE Clearing: corporate actions adjustment
• NSE: equity derivatives corporate actions adjustments
• Zerodha support: impact of corporate actions on F&O contracts
• Zerodha bulletin: adjustment of F&O contracts of ITC due to dividend
• SEBI

References

1. NSE Clearing Limited, “Corporate Actions Adjustment,” equity derivatives clearing and settlement framework.
2. National Stock Exchange of India Limited, “Equity Derivatives Corporate Actions Adjustments,” adjustment-factor methodology for splits, bonus, dividend, rights and mergers.
3. National Stock Exchange of India Limited, ITC dividend F&O adjustment worked example (Rs 6.50 strike deduction on ex-dividend date).
4. Securities Contracts (Regulation) Act, 1956, and SEBI framework on equity derivatives.
5. Zerodha support and market-intelligence bulletins on corporate-action handling of F&O contracts.