How Do You Calculate Profit And Loss In Nifty Options?

Nifty options have emerged as the most liquid trading contract on the NSE. Today, options on the Nifty alone account for more than 80% of the total volumes on the NSE on a daily basis. This volume becomes higher as the expiry for the month approaches. Let us first spend a moment on the idea of a Nifty option.

What is a Nifty call option all about?

To put it very simply, a right but not the need to buy the Nifty index at a set price on a set date, i.e. before the F&O Contract expires, is termed as a Nifty call option. Every month, on the last Thursday, this expiry happens. When you buy a Nifty call option, you are actually buying a group of 75 Nifty units together, which is called a lot. To explain this with an example, if the Nifty is at 10,477 points, one lot is worth Rs 7,85,775. So, if you buy a Nifty 10,500 call option for October, it means you can buy Nifty at 10,500 points on the last Thursday of October, if you want to.

Factors Affecting Nifty Option Profit and Loss

Before seeing how profit is calculated in option trading, have a look at the following factors that may affect it:

• Government Policies: New government rules can help or hurt businesses. Higher taxes can lower company profits and stock prices.
• RBI & SEBI Policies: When interest rates are changed by the RBI, the lower the rate, the better for the stock. SEBI’s policies can affect how stocks are traded.
• Exchange Rates: A strong rupee can hurt exporters as it makes exports costlier. On the other hand, a weak rupee will benefit them but raise import costs.
• Interest Rates & Inflation: Higher interest rates will make loans expensive and can lower stock prices, whereas rising inflation increases cost of things and reduces growth of businesses.
• Big Investors (FIIs & DIIs): When big investors buy, stock prices usually rise, but upon selling, these prices can drop.
• Natural Disasters: Disasters like floods, earthquakes, tsunamis, etc., can hurt business and lower stock prices.
• Economic Indicators: The market will be helped with a good GDP and stable oil prices, but bad numbers will end up bringing stocks down.
• Gold & Bonds: When stocks seem risky, people buy gold and bonds instead to make stock prices fall.

Understanding costs when trading in Nifty options

The following are some of the key costs pertaining to trading in Nifty options. Let us look at these costs with reference to the NSE here:

• Brokerage cost is what you pay the broker. Normally brokerage is charged on Nifty options on a per lot basis. Let us assume a cost of Rs5 per lot, which is the norm.
• Securities Transaction Tax (STT) is payable on the sell side of the option (not on the buy leg) at the rate of 0.05% on the premium value of the transaction.
• In addition, the NSE imposes transaction charges at 0.05% of the premium value and clearing charges at 0.002% of the premium value of the transaction.
• Goods and services tax (GST) is charged at 18% on the (brokerage + transaction charge) and is paid to the government.
• SEBI charges are payable at the rate of Rs15/crore of volume traded. Here, the premium volumes are considered and not the notional volumes.

Stamp Duty is payable to the state government, and these rates vary from state to state. The rate of stamp duty applicable to the state of Maharashtra is 0.002%.

All these costs are mentioned in the contract note, and it is after factoring in all these costs that the net profit of the option transaction is calculated.

Formulas to calculate P&L in NIFTY Options

If you are wondering how to calculate profit in option trading as well as loss, the table below should be of help:

The above formulas will help answer your doubts as to how to calculate call option profit and loss, as well as put option profit and loss.

Case study on the calculation of net profit on a Nifty options trade

Let us assume that a Nifty trader buys 10 lots of Nifty at Rs50 and books profits by selling these 10 lots by evening because the option price went up to Rs80. Because 1 lot of Nifty consists of 75 units, 10 lots of Nifty will consist of 750 units of Nifty. Let us look at how the detailed cost and net profit calculation is done.

Using costs to calculate break-even for the trade

As can be seen from the above illustration, the cost analysis of the option trade is useful in evaluating the break-even point of the trade. What do we understand by the break-even point of the trade? It is the point at which the trade becomes profitable. In the above illustration, we are moving a total of 10 lots of Nifty on the buy side and 10 lots on the sell side. These 10 lots are equivalent to 750 units of the Nifty, and hence, the total allocated cost of Rs209.93 translates into a break-even level of Rs0.28 (209.93/750). What does a break-even of Rs0.28 really mean? It means that if you are long on Nifty 10,500 call option at a price of Rs50, you are profitable if the Nifty moves above Rs50.28. Conversely, if you are short on the Nifty option, the price has to go below Rs49.72 for your trade to be profitable. Normally, the actual breakeven is set at a higher level to provide for other exigencies such as volatility, liquidity risk, and miscellaneous costs.

Understanding the taxation aspect of options

What you have seen above is the pre tax profits. We all know that profits are taxed; but how are profits taxed in case of options. Here are 3 interesting things to know:

• Profit and loss on options are treated as regular business income or as capital gains. Unlike intraday trading profits, these are not treated as speculative income.
• You have the choice to either file options income as part of your business income or as part of your capital gains. Both are acceptable subject to trading volume conditions.
• The idea is to maintain consistency. Once you adopt a method of recording transactions (business income or capital gains), you must consistently maintain that methodology.

Conclusion

Knowing how to calculate profit in option trading is key for every trader. Understand the basic formulas and all the costs involved, to easily be able to know how do you calculate profit on a call option, and how profit is calculated in option trading. Do not forget to include brokerage, taxes, and other charges in NIFTY Options when calculating your final profit or loss. Due to this, you will be able to make trading decisions that are smarter, along with better risk management abilities.