Summary:
The Nifty Index is a very promising start for amateur traders new to the stock exchange environment. In order to make informed options trading decisions on Nifty, traders need to learn how to calculate profit and loss. This helps them analyse options performance and improve risk management.
Nifty has become the most popular benchmark index in India. Be it amateurs or pro traders, everyone is aware of Nifty. As of 2022, Reliance Industries, ICICI Bank, HDFC Bank, Infosys, and HDFC are the top five constituents of Nifty. Since the index displays a combination of multiple stocks, it does not get highly volatile unless there is big economic development. All in all, it is an excellent and more importantly, safe way for beginners to start their options trading journey.
As more and more traders hop onto Nifty options to make surplus income, they have emerged as the most liquid trading contract on India’s National Stock Exchange (NSE) platform. Today, Nifty options account for more than 80% of NSE’s total volumes per day. This volume continues to increase as the expiry for the month approaches.
Before newbies start trading Nifty options, it is crucial to understand the basics of an options contract. Simply put, an options contract is a financial agreement between a buyer and a seller to trade an underlying asset, like shares of a company’s stock at or before the set date at a decided price, which is known as the strike price. There are two types of options:
- Call option: It is a derivatives contract that allows the buyer to profit from an upside movement in the underlying asset.
- Put option: It is commonly used as a hedging tool against potential losses in the underlying asset or to profit from a drop in the asset’s value.
While Nifty options are seen as a flexible profit-generating machine among new traders and investors in the Indian stock market, they still come with a certain level of risk. To make safer and wiser decisions, it is critical that traders know how to calculate the profit and loss (P&L) associated with options trading. This blog will help them understand the different formulas used to calculate P&L, and the key concepts involved when trading in Nifty options.
Formulas to calculate P&L in Nifty options
The type of formula you use to calculate P&L in Nifty options depends on whether you are dealing with a call or a put option. It also depends on whether you are selling or buying the option. Here is how you can calculate P&L for different scenarios:
| Scenario | Profit Formula | Loss Formula |
| Buying a call option | Profit = (Current Nifty Price - Call Option Strike Price) - Premium Paid | Loss = The Premium Paid |
| Selling a Call Option | Profit = Premium Received - (Premium Paid to Buy Back) | Loss = Premium Paid to Buy Back |
| Buying a Put Option | Profit = (Put Option Strike Price - Current Nifty Price) - Premium Paid | Loss = Premium Paid |
| Selling a Put Option | Profit = Premium Received - (Premium Paid to Buy Back) | Loss = Premium Paid to Buy Back |
The aforementioned formulas can be instrumental in evaluating the potential outcomes of your Nifty options trades. However, there are a few key costs to know while trading in Nifty options and measuring the potential profit or loss.
Costs you need to know when trading Nifty options
- Brokerage cost – It is the price paid to the broker on a per-lot basis while trading in Nifty options.
- Securities transaction tax (STT) – It is payable at a rate of 0.05% on the premium cost of the transaction.
- Transaction charges – They are imposed by the NSE at 0.05% of the premium value.
- Clearing charges – NSE imposes clearing charges at 0.02% of the premium value of the transaction.
- Goods and services tax (GST) – It is charged at 18% on the brokerage & transaction charges and paid directly to the government.
- SEBI chargers – Payable at the rate of Rs15/crore of volume traded with respect to the premium volumes.
- Stamp duty – This varies from state to state. For Maharashtra, the rate of stamp duty is 0.002%.
All these costs are mentioned in the contract note and are considered before the net profit of the option transaction is calculated.
Taxation of profits earned from options
The costs we discussed above add up to give us an idea of the pre-tax profits. However, all income, even the profits generated from options trading is taxed. P&L from options are no different from capital gains or the income you generate from a regular business setup. You can either file options income under your business income or capital gains. It is essential to maintain consistency after choosing how you want to file for the income.
In conclusion
Calculating P&L in Nifty options is vital for any trader to make informed investment decisions. Traders can effectively assess different trading scenarios by identifying the impact of volatility or market fluctuation on P&L. With proper understanding, they can also gain valuable insights into risk management and options performance to protect their investments in Nifty trading.