Extraordinary dividend
Also written Extra-ordinary dividend
For equity F&O adjustment, a dividend at or above 2% of the underlying's market price; the dividend is deducted from all option strikes and from futures positions from the ex-dividend date.
In plain language
When a company pays a dividend, its share price drops by roughly that amount on the ex-date. For a small dividend, F&O traders simply live with it. For a large one, the drop would unfairly shift value between option buyers and sellers.
So the exchanges draw a line. A dividend below 2% of the market value of the underlying is an ordinary dividend, and no adjustment is made to F&O contracts. A dividend at or above 2% is an extraordinary dividend, and contracts are adjusted. The same adjustment applies to all dividends where the listed company has sought exemption from the timeline under the SEBI (LODR) Regulations, 2015.
How it works
Deciding whether it is extraordinary (Chapter 6, section 6.7.5.3)
| Situation | "Market price" used for the 2% test |
|---|---|
| Dividend announced after the board meeting | Closing price on the day before the announcement |
| Announcement made after market hours | Same day's closing price |
| Shareholders at the AGM change the board's dividend rate | Rate communicated to the exchange after the AGM, and the closing price on the day before the AGM |
How contracts are adjusted
- Options: the total dividend amount (special and/or ordinary) is reduced from all strike prices on that stock.
- The revised strikes apply from the ex-dividend date specified by the exchange.
- Futures: all open positions are carried forward at the daily settlement price less the dividend amount.
Context. Chapter 6 lists extraordinary dividends among the corporate actions (with bonus, rights, mergers, splits and consolidations) that lead to F&O adjustments, and the only cash benefit listed is the cash dividend. The 2% threshold footnotes SEBI circular SEBI/HO/MRD2/MRD2_DCAP/P/CIR/2022/90.
The formula
Dividend yield for the test = Dividend per share ÷ Market price × 100
If ≥ 2%: Revised strike = Old strike − Total dividend per share
Futures carry-forward price = Daily settlement price − Dividend per share
A worked example
Prices and dividends are illustrative; the 2% rule and method are the workbook's.
The board of a company meets on Thursday and announces the dividend during market hours. Wednesday's close was Rs 1,000.
Case 1: dividend Rs 25 per share.
- 25 ÷ 1,000 = 2.5%, which is at or above 2%, so it is extraordinary.
- From the ex-dividend date, every option strike falls by Rs 25: strike Rs 1,000 → Rs 975; strike Rs 1,050 → Rs 1,025; strike Rs 950 → Rs 925.
- A futures position with a daily settlement price of Rs 1,012 is carried forward at 1,012 − 25 = Rs 987.
Case 2: dividend Rs 15 per share.
- 15 ÷ 1,000 = 1.5%, below 2%, so it is ordinary. No adjustment to F&O contracts.
Case 3: a different company announces Rs 25 after market hours on Thursday. Its Wednesday close was Rs 1,240 and Thursday's close is Rs 1,300. The test uses Thursday's close: 25 ÷ 1,300 ≈ 1.92%, so no adjustment. Using Wednesday's close would have given 25 ÷ 1,240 ≈ 2.02% and the wrong answer.
Why NISM asks about it
Chapter 6, section 6.7.5.3 (Dividends) gives the 2% line, the market-price rules and the strike/futures adjustment; section 6.7.1 lists extraordinary dividends among corporate actions that trigger F&O adjustments. The favourite traps are which day's closing price is used and whether a dividend exactly at 2% counts (it does).
Common exam traps
- At or above 2% is extraordinary. Exactly 2% is adjusted.
- Below 2%: no adjustment at all.
- Previous day's close for announcements in market hours; same day's close if announced after hours.
- The total dividend (special and/or ordinary) is deducted, not just the portion above 2%.
- Strikes change from the ex-dividend date, not the announcement date.
- Any dividend is adjusted if the company sought exemption from the LODR timeline, whatever its size.
- No adjustment factor is used for dividends; strikes are reduced by the rupee amount.
Where this is taught
- Series VII · Chapter 6: Settlement Processintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
Related terms
- Record dateThe date on which a company looks at its register and decides who gets the bonus, dividend, rights or split — you must be holding the shares in your demat account at the end of that day.
- Adjustment factorThe ratio by which the strike price, market lot and position of an equity F&O contract are revised after a bonus, split, consolidation or rights issue, so the position's value stays the same.
- Ex-dateThe first day a security trades without a corporate action benefit, and the cut-off that decides whether a short-delivery auction near that action proceeds normally or is closed out directly instead.
- Final dividendA dividend declared at the AGM, taxable in the shareholder's hands in the year it is declared — unlike an interim dividend, which is taxed only in the year it is actually made available to the shareholder.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.