futures are outperforming the
stock by 4% and today is not even ex-date. So what really happened here?
The essence of the situation lies in the special situation rule that exchanges have in treating futures and options contract. Normally the stock is adjusted for dividend in cash market but the same adjustment is not carried out in futures and hence, in earnings season, some of the index stocks tend to go into discount as they factor in the dividend impact. However, if the dividend is more than 10% of the market price, this falls into special category and even the futures prices are adjusted to reflect that.
What this means in simple terms is that come the ex-date, Coal India future price will also be deducted by 29 Rupees to arrive at previous day’s price. If you shorted Coal
and hence on ex-date you see
the price lower by 29 Rupees, don’t cheer it – you are not getting this money.
The case of Coal
was curious. By late afternoon
the gap between spot and futures was over 20 points but by the time the trade
wound up the discount had narrowed to 12 points. So clearly, there was some big
buying in Coal India futures before the markets
closed yesterday. Were some of these market participants sure of an over 10%
dividend? And if you had bought the
future yesterday, you would be sitting on a gain of nearly 40-50% on your margin
money given the big move in future. India
What makes it even more interesting is the dividend component. A dividend of Rs 29 is 10.03% of the market price of Coal
. Even 10 paise lower and the
dividend would have been less than 10% and miraculously, the discount would have
widened again today to nearly 28 Rupees instead of converging with future
So really, should a 10% move on future price be dependent on a differential of 10-50 paise in dividend? And what would have been the reaction if this was a private company? These are some important questions. May be time has come for the exchange to do away with this special situation rule being applied only if the dividend exceeds a certain percentage. Let them do it for all dividends. It will take away some fun on stock futures trading but it will make the process a lot more transparent.