Bonus share of Reliance Industries limited - Implications on F&O positions

Reliance Industries Limited has announced a bonus share in the ratio 1:1. The Company has fixed Monday, October 28, 2024 as the Record Date.

What is adjustment factor in Reliance Industries limited?

  Adjustment factor for Bonus share of A: B is defined as (A+B)/B.

-  In the case of RELIANCE INDUSTRIES LIMITED, the adjustment factor is (1+1)/1 = 2

What will be the new Strike price & lot size for Options?

- Strike Price: The adjusted strike price will be arrived at by dividing the old strike price by the adjustment factor i.e., 2.

- Lot Size: The adjusted lot size will be arrived at by multiplying the old market lot by the adjustment factor.

Old lot size=250

Adjustment factor = 2

New lot size = 250*2= 500

 What is the new price for future contracts?

- You can calculate the same as follow

= (Closing price / Adjustment factor) *New lot size 

= (Closing price / 2) * 500

What will happen to F&O open positions in Reliance Industries Limited?

- For clients holding F&O contracts expiring on 31^st October, 2024, 28^th November, 2024, 26^th December, 2024: These contracts shall expire on respective expiries & will be adjusted according to the framework prescribed by SEBI. The adjustment for Futures will be Price and Lot Size & for Options will be Strike Price and Lot Size and option premium.

 How price is calculated? 

 Let’s walk through an example to demonstrate the impact of the 1:1 bonus share issue on both Futures and Options positions in Reliance Industries.

 Scenario: Pre-bonus

 Reliance Stock price: ₹2,700

 Lot Size for Futures & Options: 250 shares per lot

 Option Strike Price (Call Option): ₹2,700

 Option Premium: ₹100 per share

  Position:

   1 lot of Reliance Futures (Long) at ₹2,700

   1 lot of Reliance Call Option (Long) with ₹2,700 strike price and premium of ₹100

  Post-bonus: Impact on Position

   1. Impact on Futures Position: 

       Price Adjustment: Post the 1:1 bonus issue, the price of the futures contract will be adjusted           

       downward. If the pre-bonus price was ₹2,700, the post-bonus price will be approximately

       halved to ₹1,350 (subject to market behaviour).

       Lot Size Adjustment: The lot size will double from 250 shares to 500 shares.

       Value of Position:

       Pre-bonus Value of Futures: ₹2,700 × 250 = ₹6,75,000

       Post-bonus Value of Futures: ₹1,350 × 500 = ₹6,75,000

   The notional value of the futures contract remains the same at ₹6,75,000, so the value of your      

   position is not affected in terms of total worth.

     2. Impact on Options Position:

       Value of Position:

       Pre-bonus Value of Options: ₹100 (premium) × 250 (shares) = ₹25,000

       Post-bonus Value of Options: ₹50 (premium) × 500 (shares) = ₹25,000

       Like the futures, the notional value of your options position remains the same at ₹25,000.

     Summary of Impact:

      1. Futures:

     The price will be halved (from ₹2,700 to ₹1,350), but the lot size will double (from 250 to 500).

     The overall value of your futures position remains the same.

       2. Options:

      The strike price and premium will be halved (strike price from ₹2,700 to ₹1,350, premium from ₹100 to ₹50), and the lot size will double (from 250 to 500). 

       The total value of your options position also remains unchanged.

 What happens to my futures positions when a bonus share occurs?

 - The futures contract price will be adjusted in the same manner as the stock price (divided by 2 in this case). The lot size will increase by a factor of 2. This ensures the overall value of the position remains unchanged. For example, if you hold a futures contract on 100 shares at ₹5,000, it will become 200 shares at ₹2,500 each.

What is the impact on my mark to market settlement?

- Since the futures price will be adjusted, clients' MTM values will also reflect this change. However, the overall position in value terms should remain neutral because both the price and the lot size change in proportion.

Will the open interest change after the bonus share, and how is it adjusted?

- The open interest in terms of the number of contracts or lots held remains the same, but the actual number of shares in each contract changes. So, while the contract count doesn't change, the shares per contract do, ensuring the overall position value is unaffected.

 Is there any change in margin requirements due to the bonus share?

  - Typically, the margin requirements are adjusted to reflect the new lot size and contract price. Since the value of the position remains the same, there is no significant change in the total margin required. However, brokers may notify any minor adjustments for operational purposes.

What is the margin required for revised RELIANCE INDUSTRIED LIMITED contracts?

- Margin will be as per the exchange rule of SPAN + ELM

Can I carry over my existing F&O positions after bonus shares, or do I need to take any action?

 - Yes, you can carry over your existing F&O positions after bonus shares. The exchange automatically adjusts the strike price, lot size, and contract terms, so you don’t need to take any specific action. However, it’s essential to monitor any notifications from your broker or the exchange for smooth handling of the adjustment.

How my physical settlement works under bonus share?

-If one has gone long in stock option and as on effective date i.e., 28^th October, 2024, the customer’s needs to bring 25% of Var + ELM as per the rules, the margin requirement will be as per the contract value that is unchanged.

 When will the adjustment be reflected?

 -The adjustments in F&O positions will be made by the exchange at the time of the ex-bonus date (28^th October 2024). The expected changes to be seen on the next trading day.

 What happens if I exit my position before the ex-bonus date?

 -If you exit F&O position before the ex-bonus date, they will not be affected by the bonus adjustment. The exit will occur at the market prices prior to the adjustment.

  How one can check corporate action while having an open position?

   - It is shown in order book in offline mode. The changes will reflect before the execution date i.e, 26th October,2024 on F&O open positions.

Will it impact my profit / losses?

 -No, it does not affect your profit and losses as the contract value remains unchanged.

   Only strike prices, lot size and premium will be adjusted accordingly.

  What will be the impact on portfolio?

 -The portfolio will show the following transactions.

   Adjustments in portfolio are shown as below:

 For Example - 550-PE, 540-PE, 520-PE strikes is valued at 110-PE, 108-PE, 104-PE respectively    as shown above in portfolio details.

Transactions will show the price adjustment at ₹0.05 with adjusted strike price with adjusted lot size as shown below:

 Overall Trading impact on 28^th October,2024

Your total position value is unaffected by the bonus; it's just the numerical parameters (strike price, lot size, and premium) that are adjusted accordingly. One can exit its position partially as the number of lot size is increased.

In summary, the bonus shares only adjust the numerical values of strike prices, lot sizes, and premiums while keeping the overall value of F&O positions unchanged.

Points to Remember:

-Review Portfolio: Clients should be advised to review their portfolio post-adjustment to ensure everything is in order.

-Monitor Volatility: Bonus issues can lead to some short-term volatility in stock prices, which may affect options premiums and futures prices.

-The bonus issue is a neutral event in terms of your position value.

-Take actions accordingly if you want to modify or exit your position or you can partially square off too.

It is advisable to monitor F&O positions in RELIANCE INDUSTRIED LIMITED and take timely action.