What does Option contract adjustments mean ?

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.

What corporate events or actions require Options adjustments?

Events or corporate actions that require options adjustments are

• Mergers
• Amalgamation
• Splits
• Reverse Splits
• Takeovers
• Acquisitions
• Announcements of high dividends

What does Option adjustment mean?

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.

1. Strike Price
2. Position
3. Multiplier / Market Lot

All positions are subject to adjustment, whether they have been exercised or not.

How are Options adjustments made?

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:

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

How do you know if an option agreement has been modified?

You can tell if an option contract is being adjusted by looking at these indicators:

• This option is either too expensive or too affordable
• Two symbols are available for the Options of the Same Month and Strike Price.
• Adjusted Options have lower liquidity than other Options