Understanding Unrealised P&L Adjustments due to strike price change or quantity (any corporate action) and their Impact on Your Neo Portfolio

Managing your Portfolio Holdings involves understanding how adjustments to strike prices and quantities, affects the unrealized Profit and Loss (P&L) displayed on your Neo Portfolio. One of the common concerns we receive from customers is related to incorrect Unrealized P&L, particularly when changes in strike price or quantity occur whenever there is a corporate action like dividends, bonus, merger, demerger, etc. or when there is a change in name of the instrument or expiry change from exchange. In this blog, we aim to explain why this happens based on a bonus case and how it is managed from our end on the Kotak Neo app.

The Process for Adjustments

When adjustments such as a bonus, stock split, or any corporate action occur, it necessitates changes in your Portfolio to reflect the updated position. To handle these scenarios, we follow these steps:

1. Knocking Off the Existing Position

• A corresponding Buy/Sell entry is made with a zero cost price to nullify the existing open position.

2. Re-Entering with Adjusted Details

• The initial Buy/Sell entry is re-entered with the updated strike price or quantity, but with a zero average cost price.

This process ensures that your portfolio is technically aligned with the new position post-adjustment. However, it can lead to discrepancies in the Unrealized P&L displayed on the Neo Portfolio front-end until you close the position. We also send the corresponding contract notes.

Why Does The Unrealized P&L Appear Incorrect?

Let’s break this down with an example:
1. Initial Position:

• Strike Price: 260PE SELL
• Quantity: 2700
• Cost Price: 4.48
• Total Amount: 12,096 (4.48 x 2700)
• Unrealized P&L displayed matches the current market price, so there are no issues initially.

2. Bonus Declared:

• To reflect the bonus, we post an adjustment BUY entry for 2700 quantity at zero cost. This books a profit of 12096, which is shown in your Realized P&L.
• Another adjustment entry is made with the new quantity (e.g., 3600 post Bonus effect) to account for the bonus effect. As a result, an unrealized profit of around 11,000 (considering LTP as 3.06) might be visible in the front end until the position is squared off.

3. When The Position Is Closed:

• Suppose the client squares off the position at a rate of 3.31, amounting to 11,916 (3.31 x 3600).
• The total realized P&L gets corrected to 180, reflecting the actual profit or loss after adjustments.

Common Concerns and Their Resolution

Most customer concerns arise because the Unrealized P&L displayed during the interim phase seems incorrect or inflated. This is due to the adjustment entries being factored in with a zero cost price, which temporarily skews the calculation.

What You Should Know:

1. Temporary Nature of Discrepancy:

• The unrealized P&L shown during this period is a temporary calculation. It aligns correctly once the position is squared off.
  2. Impact on Realized P&L:
• The final Realized P&L, which reflects your actual gains or losses, is always accurate after the position is closed.
  3. Transparency in Reporting:
• All adjustments are visible in your transaction history, ensuring transparency in how the positions are managed.

Key Takeaways for Customers

• Understand the Adjustment Process: Adjustments are necessary to accurately reflect changes in your position due to corporate actions like bonuses or splits.
• Focus on Realized P&L: While Unrealized P&L can appear skewed temporarily, the Realized P&L post squared-off is the final measure of your trading performance.
• Review Transaction Details: Regularly check your transaction history / Contract Note to understand the adjustments and their impact on your account.

By being aware of these processes, you can better interpret the Unrealized P&L figures displayed and focus on the actual profitability of your trades. If you have further questions or concerns, our support team is always here to assist you!