InvestorQ : If the company issues rights shares, how are options contracts adjusted?
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Arya Nanda made post

If the company issues rights shares, how are options contracts adjusted?

Answer
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Maniish Lofar answered.
2 years ago


Rights are shares issued by the company to existing shareholders and are normally issued at a discount to the market price to make it more attractive. The adjustment for rights needs to be made because rights leads to dilution of the equity and increase in number of shares outstanding. Here is how the adjustment for the rights is done in options.

Rights Ratio A : B, Benefit per right entitlement ( C) : P - S Benefit per share (E) : (P – S) / A+B Underlying close price on the last cum date (P) Issue price of the rights (S)

Adjustment factor = (P-E)/P To be multiplied by old strike price & divided into old lot size to arrive at the new strike price and lot size

The relevant authority may, on a case by case basis, carry out adjustments for other corporate actions in conformity with the above guidelines, including compulsory closing out, where it deems necessary.