Capital markets regulator Sebi on Tuesday came out with new adjustment rules for dividends in Futures and Options (F&O) scrips.
“It has been decided that the adjustment in derivative contracts shall be carried out in cases where dividends declared are at or above 2 per cent of the market value of underlying stock,” Sebi said in a circular.
The threshold has been revised from 5 per cent and above to 2 per cent and above. The new framework will be applicable from Wednesday.
Currently, dividends that are below 5 per cent of the market value of the underlying stock are deemed ordinary dividends and no adjustment in the strike price is made for such dividends.
For extra-ordinary dividends, which will be at and above 2 per cent of the market value of the underlying security, the strike price would be adjusted.
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 decision was taken after several stakeholders had requested to review the framework and various suggestions were examined by the Secondary Market Advisory Committee (SMAC) of Sebi.
Strike price, in market parlance, is the price at which a derivative contract can be exercised. It is mainly used to describe stock and index options.
For call options, the strike price is where the security can be purchased by the option buyer up till the expiration date. For put options, the strike price is the price at which shares can be sold by the option buyer.