Cash dividends affect F&O contracts because they influence the
price of the underlying stock, which typically drops by the dividend amount on
the ex-dividend date.
1. When is an adjustment made?
• If the dividend is less than 2% of the stock’s market price → It’s treated as a normal dividend.
No adjustment is made to strike prices or futures contracts.
• If the dividend is equal to or more than 2% of the stock’s market price → It’s considered an extraordinary dividend.
Strike prices and futures prices are adjusted accordingly.
2. Example of Adjustment:
Scenario:
• XYZ stock trading at ₹500.
• The company declares an extraordinary dividend of ₹20.
Futures:
• You bought a future at ₹490 before record date.
• On the ex-dividend date, the price adjusts by the dividend amount:
➤ New average buy price = ₹490 - ₹20 =
₹470
➤ New market price = ₹500 - ₹20 = ₹480
Options:
• You hold a Call Option with a ₹500 strike price, premium ₹10.
• Post ex-dividend date:
➤ New strike price = ₹500 - ₹20 = ₹480
➤Premium remains the same at ₹10.