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A Nifty option is one of the most sought-after liquid trading contracts on the National Stock Exchange. With Nifty option trading coming to more than 80% of the total volume on NSE daily, here’s a look at how to calculate profit and loss in this contract.
An option is a financial instrument that is based on the value of its underlying stock, index, and ETFs or exchange trading funds. This kind of contract provides the buyer with the opportunity to buy or sell the underlying asset, depending on the kind of security they hold. However, the buyer is not obliged to buy or sell the asset.
There are two types of options in the stock market; call option and put option. Call options give an investor the right to buy an underlying asset at the strike price without the obligation to act on it. Put options, on the other hand, give an investor the right to sell an underlying asset at the strike price, without any obligation.
Here we will understand what a Nifty option is and how to calculate its profit and loss.
When you trade NIFTY options, you need to be fully aware of all associated costs—not just the premium. Many first-time traders overlook certain charges that reduce overall profitability. Understanding these expenses helps you plan better and stay compliant with trading margins and obligations. Here is a detailed look at the costs you should track carefully.
You pay a fee to your stockbroker for executing each options trade. The brokerage structure may be flat or based on per-lot pricing. You must check how much is charged for buying and selling separately, as charges apply on both legs of the trade.
STT is levied on the sell side of options transactions. You pay this tax only when you square off or let an option expire in the money. It is calculated based on the settlement value and can affect your overall post-tax gains.
These are fees charged by the exchange (NSE) for facilitating trades. You will find these listed clearly on your contract note. Though the amount per trade is low, frequent trading or large lot sizes can increase this cost over time.
Goods and Services Tax (GST) is levied at 18% on the brokerage amount and other service charges. Though it is not applied on the premium or the transaction directly, it adds to your trading cost and should be accounted for during position sizing.
Stamp duty is charged on the buy side of options trades. It is calculated as a percentage of the contract value. This state-level duty may differ slightly depending on where your trading account is registered, but it is mandatory across all states.
The Securities and Exchange Board of India (SEBI) levies turnover charges on the total transaction value. These charges apply uniformly to all option trades. While they may seem minimal on individual trades, they add up when you trade regularly or in large volumes.
If you trade NIFTY options regularly, it is important that you understand how profits from such trades are taxed. Whether you earn consistently or occasionally, the Income Tax Act requires accurate disclosure of income. The tax treatment depends on your trading frequency, classification of income, and applicable slabs. Here is how the taxation works.
Profits from options trading are classified as business income—not capital gains—because derivatives are considered speculative or non-speculative business activity. You must declare this income under the head ‘Profits and Gains of Business or Profession’ when filing your tax return.
Options trading on recognised exchanges like the NSE is treated as non-speculative business income. This distinction allows you to offset losses against other business income and carry forward losses for up to eight assessment years, subject to compliance with tax filing timelines.
The tax rate depends on your total income. You are taxed according to the applicable slab under the old or new tax regime. Business income from options trading is added to your total earnings and taxed after allowing for expenses, if claimed and substantiated.
If your total turnover from trading derivatives (futures or options) crosses a specified threshold or if your declared profits are below the presumptive rate, a tax audit may be mandatory. You should consult a tax professional to determine audit applicability and prepare accordingly.
If your tax liability from trading profits exceeds ₹10,000 in a financial year, you are required to pay advance tax in four instalments. Failing to do so may attract interest under sections 234B and 234C of the Income Tax Act.
You must maintain books of accounts if your income from options trading qualifies as business income. These records include trade summaries, profit and loss statements, contract notes, and expense details. They are crucial during audits or assessments and help validate your tax declarations.
The Nifty call option gives the buyer the right to buy the underlying Nifty without the obligation to buy. If the buyer wishes to purchase the underlying Nifty at a fixed price and on a fixed date, it has to be done before its expiry keeping the Futures and Options contracts’ expiry in mind. F&O contracts expire on the last Thursday of every month.
Nifty, like other shares, has a fixed lot size of 75 units at this time. It also has multiple expiry periods and different strikes.
A Nifty option, like Features, is a derivative. But where the profit and loss aspect in Features is linear, the same does not apply to a Nifty option. The profit and loss aspect during a Nifty option trading will not be straightforward and will not depend on the up and down movement in the NSE.
When an investor purchases a call option, they are awaiting the market to rise. So, by paying the premium on the Nifty option, they purchase the right to hold it. To buy the option lot, an investor or trader only needs to pay the option premium of the true value of the underlying asset like Nifty.
Additional Read: NIFTY 50 vs NIFTY Alpha 50
When it comes to Nifty option trading, certain costs need to be kept in mind. Here’s a look at these costs concerning the National Stock Exchange:
It is after calculating all these costs that the profit for the option transaction gets calculated.
Additional Read: What is FinNifty in the Stock Market
The type of formula you need to calculate the P&L in Nifty options will always depend on the kind of Nifty option one is dealing with i.e. whether it is a call or a put option. Another factor that determines what formula to use is whether you are buying or selling the Nifty option.
Listed below are the different scenarios and the formulas to use to calculate P&L:
1. For Buying a Nifty Call Option:
In case you are thinking of buying a Nifty Call Option, here are the P&L calculation formulas you should be aware of:
(Current Nifty Price - Option Strike Price) - Premium Paid
The loss incurred on such a transaction is the Premium an investor paid for the option.
2. For Selling a Nifty Call Option:
If you are looking to sell your Nifty Call option, these are the P&L calculation formulas that you should know:
Premium Received - (Premium Paid to Buy Back)
The loss incurred is what Premium the investor paid to buy back
3. For Buying a Nifty Put Option:
If you are looking to buy a Nifty Put option, it would be handy to keep the following P&L calculation formulas in mind:
(Put Option Strike Price - Current Nifty Price) - Premium Paid
Here also the loss incurred is the Premium Paid for buying the Nifty Option.
4. For Selling a Nifty Put Option:
Here are the P&L calculation formulas if you want to sell a Nifty Put Option:
Premium Received - (Premium Paid to Buy Back)
The Premium Paid to Buy Back is the loss incurred in this scenario.
There are many factors that affect the profit and loss in Nifty Option trading. Here is a list:
One of the most crucial aspects that affects option prices is market volatility. With high volatility comes higher option premiums. This helps traders potentially benefit from the swing in the prices. Traders who are capable of adapting their strategies to use the market volatility for their benefit are usually at the receiving end of profits.
The value of any options contract is linked to the asset’s underlying value. Call options gain a lot of value in a rising market and put options are profitable in declining markets. The ups and downs of the underlying value of an asset determine the potential profit of the option in question.
With the expiration date nearing the factor of decay time comes into the picture. As the option nears the expiration date nears, its value decreases because of this time decay. This factor can have a great impact on the profit or loss of the option.
Interest rates have quite a bit of influence on any option pricing. This is because these interest rates mould the cost of carrying the underlying asset. Investors always keep interest rates in mind when altering or defining their strategy for the option they hold.
In case the underlying asset of an option is a stock, dividends can affect the option pricing, and by extension the profit or loss of that particular option.
To navigate effectively through Nifty option trading it is important to keep the aspects of profit and loss in mind. Investors need to consider every factor before tweaking their strategy for a Nifty option. This will improve their potential to make profits on a Nifty option greatly.
Of course, an investor needs to do their research when trading online and then make the best decision regarding their approach towards the Nifty option.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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