On November 11, 2016, Huaxia Fund Management Co., Ltd. issued the “Announcement on Dividend Distribution of SSE 50 ETF”, stating that the SSE 50 ETF (ticker symbol: 50 ETF; code: 510050) would distribute dividend, with the ex-dividend date of November 29. It will be the first dividend distribution by the underlying of the SSE 50 ETF option contract since the option’s launch on February 9, 2015. The Shanghai Stock Exchange (SSE) will, according to the “SSE Rules for Pilot Program of Stock Option Trading”, adjust all the unexpired contracts of the SSE 50 ETF option on November 29 and re-launch new option contracts.
Q1: Why need the option contracts to be adjusted after the dividend distribution of the SSE 50 ETF?
A: When an option contract’s underlying has right and interest changes (such as dividend distribution), the option contract needs to be adjusted to ensure that the interests of the buyer and the seller of the option contract are not affected. The contract’s nominal value will remain unchanged after the adjustment, with its market value approximately equal to that before the adjustment.
Q2: What adjustment will be made to the terms of the option contract? How to adjust?
A: Exercise price, contract unit, trading code and short description will be adjusted for all the unexpired SSE 50 ETF option contracts.
(1) New contract unit = [original contract unit (10,000 units) × closing price of SSE 50 ETF on Nov. 28] / [closing price of SSE 50 ETF on Nov. 28 － cash dividend (RMB0.053 per unit)]
(2) New exercise price = original exercise price × original contract unit / new contract unit
The adjusted contract unit is rounded off to an integer, while the adjusted exercise price is rounded off to the nearest 0.001.
(3) The 12th place of the contract’s trading code is adjusted to A from M, which means the first adjustment is made to the option contract; the exercise price from the 13th place to the 17th place of the code remains unchanged.
(4) The exercise price for the short description of the contract is adjusted to the new exercise price, and the symbol in the final place is A. (Originally, there is no symbol.)
RMB0.053 dividend is distributed for every fund unit of the SSE 50 ETF. As the closing price of the SSE 50 ETF on November 28 is unknown, taking the closing price of RMB2.361 of the SSE 50 ETF on November 16 as an example, the new contract unit = [10,000 ×2.361] / [2.361-0.053] = 10,230.
The adjustment is as follows:
| Number | Trading code | Short description | Exercise price (RMB) | Contract unit |
|---|---|---|---|---|
| Before adjustment | ||||
| 10000661 | 510050C1612M02300 | 50 ETF Buy Dec 2300 | 2.3 | 10,000 |
| 10000669 | 510050C1612M02350 | 50 ETF Buy Dec 2350 | 2.35 | 10,000 |
| 10000691 | 510050C1612M02400 | 50 ETF Buy Dec 2400 | 2.4 | 10,000 |
| After adjustment | ||||
| 10000661 | 510050C1612A02300 | 50 ETF Buy Dec 2248A | 2.248 | 10,230 |
| 10000669 | 510050C1612A02350 | 50 ETF Buy Dec 2297A | 2.297 | 10,230 |
| 10000691 | 510050C1612A02400 | 50 ETF Buy Dec 2346A | 2.346 | 10,230 |
Q3: How to calculate the price limit and the initial margin of the SSE 50 ETF option contract after the adjustment on November 29?
A: After adjustment to the option contract, the trading and settlement will be carried out according to the adjusted contract terms. On November 29, the price limit and the initial margin will be calculated according to the adjusted contract unit and the previous settlement price. Specifically, the adjusted previous settlement price ＝ original contract settlement price × original contract unit / new contract unit
Q4: How many new contracts will be launched and traded on November 29?
A: The SSE will, according to the ex-right and ex-dividend price after the dividend distribution of the SSE 50 ETF, re-launch 40 new call and put option contracts for 4 expiry months (Dec 2016, and Jan, Mar and Jun 2017), with five exercise prices (one at-the-money, two in-the-money and two out-of-the-money). The contract unit of the newly launched contracts is 10,000, with the 12th place of the trading code being M and no symbol in the final place of the short description.
Q5: What issues should position-holding investors of the adjusted option contract pay attention to?
A: After adjustment to the option contract, the SSE will not add any contracts with new expiry months and exercise prices for the adjusted contract. Besides, if the end-of-day position of the adjusted contract is zero, the SSE will delist the contract on the next trading day. Thus, investors need to pay attention to the liquidity of the adjusted contract.
Q6: What issues should option investors with covered position on November 29 pay attention to?
A: The covered position will face insufficient covered securities as the new contract unit is higher than the original contract unit (10,000) after the adjustment to the option contract. Therefore, investors with covered positions need to supplement covered securities according to the new contract unit within the prescribed time. Forced liquidation may be imposed if they fail to make the supplementation or close out their positions in a timely manner.
