If an ASX listed entity over which there are exchange traded options (ETO) makes a pro-rata change to its ordinary share capital structure (eg. bonus issue, declares a special dividend), ASX may make an adjustment to the specifications (see below) to its ETO, in order to preserve the value of open positions held by takers and writers at that time as best as possible.
The ETO contract specifications which may be adjusted are:
- contract size
- exercise price
- expiry date
- number of contracts
- underlying securities
Usually, the adjustment method maintains as far as practicable the total exercise value over the ex-period. That is, the result of the number of contracts multiplied by the contract size and multiplied the exercise price is kept as the same total exercise dollar amount, before and after the ex-date.
Under the Operating Rules, ASX determines whether an adjustment is appropriate and notifies the market by way of a Notice to ASX Clear Participants of the ETO adjustment to be applied and the effective adjustment date (usually the ex-date). All queries from clients of broker participants on adjustment matters are to be conducted with their brokers, and not with the ASX.
Corporate events that do not strictly affect shares in a pro-rata manner, that is proportionally, are generally excluded from an option adjustment. For instance, an entitlement issue of 500 shares for each shareholder, (irrespective of the number of shares held by a shareholder) is not a strictly pro-rata issue. But a bonus issue of 1 for 2 does result in an adjustment as it is a pro-rata issue of 500 new shares for each 1000 old shares held.