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Corporate Actions

Corporate actions are events initiated by companies that directly affect stock prices, outstanding contracts, and shareholder positions.
For traders, these events cause adjustments in Futures & Options contracts (strike price, lot size, positions), and if not handled properly, they can lead to errors in analysis.

AlgoTest manages corporate actions in historical data, ensuring your backtests and simulations remain accurate.

Where Corporate Actions are Managed​

  • Simulator
  • Backtest Strategies
  • Realised Volatility

Common Types of Corporate Actions​

  1. Bonus Issues

    • Extra shares issued to shareholders free of cost.
    • Example: Bonus 1:1 → For every 1 share held, you receive 1 additional share.
    • Effect: Share price halves, lot size doubles.

  2. Stock Splits (Face Value Sub-Division)

    • A company divides its shares into smaller-value shares.
    • Example: Split 2:1 → 1 share becomes 2 shares, each priced at half.
    • Effect: Share price reduces, lot size increases proportionally.

  3. Rights Issues

    • Shareholders get the right to buy additional shares at a discounted price.
    • Example: Rights 1:8 @ Premium ₹192 → Existing shareholders can buy 1 new share for every 8 held, at ₹192 premium.

Why Corporate Actions Matter in Historical Analysis?​

If corporate actions are not accounted for, then:

  • Backtests show inconsistent results (wrong entry/exit prices, mismatched strikes).
  • Simulator outputs become unreliable.
  • Realised Volatility is distorted.

Examples:​

Pre-Split (2:1)

  • Stock Price = ₹500, Lot Size = 100
  • Post-Split, Stock Price = ₹250, Lot Size = 200
  • If you sold 1 lot ATM Straddle at 500 (100 qty), after the split it becomes 1 lot ATM Straddle at 250 (200 qty).

Corporate Action: Split 10:1

  • Effective Date: 4-Mar-2025
  • Adjustment Factor = 10
  • If Closing Price on 4-Mar = ₹1000 → Adjusted Price on 5-Mar = ₹1000 ÷ 10 = ₹100

AlgoTest backadjusts these changes in historical data to maintain continuity.

Adjustment Factor Calculation​

NSE prescribes formulas to adjust prices, strikes, and lot sizes:

a) Stock Split​

  • If ratio = A : B
  • Adjustment Factor = A / B

b) Bonus Issue​

  • If ratio = A : B
  • Adjustment Factor = (A + B) / B

c) Rights Issue​

If ratio = A : B

  • P = Close price on last cum-date
  • S = Rights issue price
  • C = (P - S) × A
  • E = C / (A + B)
  • Adjustment Factor = (P - E) / P

With AlgoTest, traders can rely on accurate historical analysis and strategy building, knowing that corporate actions like Splits, Bonuses, and Rights Issues are seamlessly accounted for in backtests and simulations.