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I hold a market lot of Nalco. Is it possible for me to write a covered call on this by furnishing this lot as the security instead of the margin money, which the exchange insists for option writing. — Theyunni

It is possible to provide the market lot of Nalco towards the initial margin payable. Nalco is an approved security and can be tendered towards the margins payable. Some portion of the margin payable, however, should be in cash. The portion of the margin payable in cash by the client is, however, at the discretion of the broker. Some brokers accept cash payment of 25 per cent and the rest in approved securities. Some brokers may even demand 100 per cent of the margins to be paid in cash. If the broker accepts approved securities, then they would have to be pledged to the broker.

How option prices get affected due to Dividend? — Ashish Namdeo

The effect on option prices would depend on changes made to the strike price. Strike prices are not adjusted by stock exchanges for all dividend announcements. Strike price is adjusted for dividends only if it is more than 10 per cent of the value of the underlying stock. If dividends are less than 10 per cent of the market value of the stock, they are considered as ordinary dividends and no adjustment is made to the strike price.

If the strike price is adjusted then option premium will not fall sharply. This is because the adjustment to the strike price will ensure that the value of the position is not altered because of the dividend payment.

If the strike price is not adjusted, then the option premium will mirror the trends in the spot price. If spot prices decline when they the stock goes ex-dividend, option premium will also decline. The decline is likely to be almost equal to the decline in the spot price.

For instance, consider the stock of ONGC, which declared a dividend of Rs 20 per share in December 2004. The stock fell by nearly Rs 24 on December 28, which was the record date. The call option of ONGC, with a strike price of Rs 800, also recorded a decline of Rs 17 on the same day.

The impact of dividends on all stock options will not be similar. Its effect, however, will need to be considered when buying into options. Given that this is the season for interim dividends, traders will need to exercise more care.

Suresh Krishnamurthy

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