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C. Raja Rajeshwari

If I have bought options for a certain stock when it was cum dividend, and when I sell, it is trading ex dividend. Do I get any part of the dividend? If so, when, or how is it adjusted? To give an example, suppose I have bought the Tata Steel June 150 options at a premium of Rs 6, when it was cum-dividend, the share price falls as it turns ex-dividend, and so does the premium. How is this problem addressed if at all? — Dr. M.L. Bhatia

Dividends, which are below 10 per cent of the market value of the underlying stock, would be deemed ordinary dividends and no adjustment in the strike price would be made for them.

In case the dividend is extra-ordinary in nature, that is if the dividend is above 10 per cent of the market value of the underlying security, then the strike price would be adjusted.

# The market price that is taken into consideration in the above cases is the closing price of the scrip on the day before the date on which the announcement of the dividend is made by the company after the meeting of the Board of Directors.

# However, in the cases where the announcement of dividend is made after the close of the market hours, the same day's closing price would be taken as the market price.

# In the case of declaration of extra-ordinary dividend by any company then the total dividend amount 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.

Tata Steel announced a Rs 8 dividend, which is ordinary and hence no adjustment was made in the options.

If you sell after it goes ex-dividend, you lose on the dividend owing to the fall in the underlying spot. The in-the-money loses money to the extent of the adjustment in the spot owing to the dividend payout.

To take care of this loss in value, you have to either exercise just before it goes ex-dividend or square-off it before the ex-date.

Tata Steel went ex-dividend on June 9, 2003. You exercise it on the day before the stock goes ex-dividend - June 6, 2003, then you make Rs 11.85 (161.85 - 150).

You square your position the day before the stock goes ex-dividend. If you have squared the position on June 6, 2003, when Tata Steel was trading at Rs 161.85, you would have made Rs 6 (12 - 6) from your difference in premiums.

If it was not cash settled, as is the case in India, then you could have exercised the call and received the stock. Having the stock before the ex-date would entail you to receive the dividend of Rs 8.

You would have got the dividend and sold the stocks later. This excess amount of Rs 5.86 (11.85-6) leaves you almost in the same position, as you would have been if you had physically exercised the call.

In case you have not squared off or exercised your option by the ex-dividend date, you lose some of the call premium because of the fall in the stock price.

Tata Steel declined from Rs 161.85 to Rs 155.75 on Monday. The July 150 calls closed at Rs 9.10. This means that you get less even if you square off and exercise the option.

Tata Steel went ex-dividend on June 09, 2003 - Monday. On the previous Friday, the last day when the counter was trading cum-dividend, call open interest increased. On Monday's closing, as the counter got ex-dividend the call open interest decreased by almost 30 per cent. Could you make out the reason for such a wild movement? — Agarwal S

This wild movement in the calls was due to the heightened buying and selling in the in-the-money calls on Friday and the closing out or exercising of the calls.

Take the June 140 call for example.

The buyer of the call on Friday has a debit of Rs 20. On exercising the call on Monday, he would get a credit of Rs 21.85 (161.85-140). The profit made is Rs 1.85. The lot size of Tata Steel is 1800, which means a profit of Rs 3,330.

On the other hand, if a call was sold (written) on Friday for Rs 20, then the seller would have a credit of Rs 20. On squaring, the position on Monday, then there would be a debit of Rs 16.55. Your net gain would be Rs 3.45 (20-16.55).

Though the net gain in writing a call is greater than buying a call, the margin amount to be maintained with the exchange and the chances of the call being assigned on early exercise even before you can square your positions should be taken into consideration.

Call sellers can either square off their open positions or roll over positions, to protect their downside. However, the chances of the new strike being exercised should be taken into consideration. A higher strike should be chosen for rolling over, which means that the premium would be not be high, as you might choose a out-of-the-money call.

I would like to know the tradable lot of the options and futures. — T.N. Sivasubramanian

NSE has laid down the lot size for S&P CNX Nifty futures and options for individual stock derivatives. The tradable lots are given in the table below. You can only trade in the lots prescribed and in the multiples thereof.

If I don't square off my option position before the expiration of the option contract, what will be its effect? — Javeed

In case it is out-of-the-money option, it is worthless. If it is in-the-money, then it is automatically deemed to be irrevocably exercised, on the expiration date, subject to the rules, byelaws and regulations of the exchange. If you are a call buyer, then you would be paid the difference between the strike and the spot prices. If you are a call writer, then you have to pay the difference between the strike and the spot prices.

If you have any queries relating to the futures/options markets and strategies, please mail them to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002 or email them to vaidy@thehindu.co.in with a mention of futures/options in the subject line of the mail.

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