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Practically speaking, are individual stock futures/options and Index futures/ (options on futures) protected from arbitrary company action? Say, in the extreme, all companies suddenly pays huge dividend (99%) or split stocks like crazy (1 to 100)?

I define protected as: a contract is protected if it is not affected by arbitrary corporate actions specifically split and dividend. In the above scenario, if the contract is not protected. in the above long futures will wipe out the the amounts associated with the underlying and call options will become worthless. Yet, there will be no change for stock holders.

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  • $\begingroup$ What do you mean by protected? $\endgroup$
    – David Addison
    Jul 14, 2018 at 15:22
  • $\begingroup$ @DavidAddison, I define protected as: a contract is protected if it is not affected by arbitrary corporate actions specifically split and dividend. In the above scenario, if the contract is not protected. in the above long futures will wipe out the the amounts associated with the underlying and call options will become worthless. Yet, there will be no change of Profit loss for stock holders. $\endgroup$
    – user40780
    Jul 14, 2018 at 19:08

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Actually, you'll be made whole. Stock splits won't affect the value of whatever derivative you hold.

For example, if you hold one call option on XYZ at strike \$100, and they undergo a 2-for-1 stock split, you'll end up (the Options Clearing Corporation does this automatically) with two call options with strikes of \$50.

The same goes for futures contracts (e.g. single-stock futures will be split in the same proportion as the stock split).

However, dividend announcements will certainly change the perceived value of the equity of a company. As for precisely how, it depends.

For example, if company A announces that they'll be releasing 100% of free cash flow to equity to pay dividends, the stock could jump temporarily as investors crowd in to secure their yield, but the stock might plummet after the ex-dividend date due to a loss of confidence in management's ability to grow the company (i.e. clearly the firm no longer wishes to invest in its own growth). And any move in the current stock price will change the price of its derivatives.

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  • $\begingroup$ Let's talk more about the dividend, effect, in essence, here I will assume the price only drop however much dividend is paid. For example, think about the stock being SHY where all it holds is cash. If SHV is 100 before dividend, it pays 70 dividend and its price becomes 30. Holding SHV won't lose a cent. But how about SHV derivatives(futures/options). $\endgroup$
    – user40780
    Jul 17, 2018 at 1:28
  • $\begingroup$ What do you think would happen? $\endgroup$
    – Kevin Li
    Jul 17, 2018 at 11:17
  • $\begingroup$ Depends if they are still being made whole. If yes, then we did not lose a cent either, otherwise. If it is not adjusted, holdings futures and options results in huge loss. $\endgroup$
    – user40780
    Jul 17, 2018 at 14:15
  • $\begingroup$ Yes you're right. But they will be made whole. $\endgroup$
    – Kevin Li
    Jul 17, 2018 at 14:31
  • $\begingroup$ Oh~ I see, that's the key :) Thank you very much. $\endgroup$
    – user40780
    Jul 17, 2018 at 15:39

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