The stock price can be affected by events such as mergers, splits or take-overs. Stocks can also be affected by derivative Options. Options contract adjustments are made to account for corporate events or actions and to ensure that the Option contract's value does not change due to corporate action.
Events or corporate actions that require options adjustments are
According to SEBI regulations Adjustments are modifications to positions or contract specifications to ensure that the value of buyers and sellers' positions remains the same. Depending on the nature and purpose of corporate action, the Options adjustments may be made to any or all of these components.
All positions are subject to adjustment, whether they have been exercised or not.
SEBI has established guidelines for options adjustments for stock splits, bonuses and consolidations.
SEBI offers formulae to calculate the adjustment factor for the Option contract. After factoring in the adjustment factors, the new value of different components of an option contract such as strike price, market lots, and positions, is then calculated.
Here's how to calculate the adjustment factor for bonus, stock splits and consolidations:
Stock Splits & Consolidations
Ratio - A : B
Adjustment factor= (A+B)/B
Ratio - A : B
Adjustment factor A/B
Ratio - A : B,
New Strike Price is equals to ((B * X) + A * (C + D))/(A+B)
Existing Market Lot/Multiplier/Position= Y
New issue size= Y*(A+B)./B
Premium - C
Face Value - D
Existing Strike Price - X
After the adjustment factor has been calculated using the above methodology, new values for the contract components can be calculated as-
New Strike price is equals to : Old Strike price/Adjustment factor
Multiplier / Market Lot = Old market lot * Adjustment factor
New position = Old position * Adjust factor as under
You can tell if an option contract is being adjusted by looking at these indicators: