How to Calculate Profit and Loss in Nifty Options?

Understanding Nifty Options

Nifty options, a key part of futures and options trading, are contracts in which buyers and sellers agree to buy or sell at a predetermined price at a future date. Nifty options trade on the NSE and form one of the most popular forms of options trading in India. The option purchasers are free to use their right to purchase and sell. They are free to decide not to use their right if they so desire.

 

There are two types of options that you will get into, and they are:

• Call Options: This gives you the right to purchase at the strike price of the Nifty index.
• Put Options: This will give one the right to sell the Nifty index at the strike price.

To understand profit or loss in NIFTY options trading, you first need to know how they're settled. NIFTY options are based on the market index value. On the expiration date, the difference between the strike price (your chosen price) and the spot price (current NIFTY price) is calculated. This difference shows whether you've made a profit or loss, and it's settled in cash.

Profit Calculations in Nifty Call Options

 When investors buy a Call option, they would be expecting that the Nifty index will go up higher than the strike price.

• Notice the Strike Price: This is a price at which you have the right to buy the Nifty index.
• Check the Spot Price: This is the existing market price of the Nifty index.
• Calculate the Difference: The difference between the spot and strike prices.
• Premium: Deduct the premium you pay for buying the option from the above-calculated difference.
• LOT Sizing: The Nifty options are traded in lots. Therefore, this result will be multiplied by LOT size, mostly 50.

 

Example: Suppose an investor purchased a Call option with a strike price of ₹17,000, and the current spot price of Nifty index is ₹17,200. You paid a premium of ₹50 per unit, and the lot size is 50.

• Profit Per Unit = ₹17,200 (Spot Price) - ₹17,000 (Strike Price) - ₹50 (Premium)
• Profit Per Unit = ₹150
• Total Profit = ₹150 x 50 (Lot Size) = ₹7,500

In this case, an investor would make a profit of ₹7,500.

Note that in a call option, your profit potential is unlimited theoretically because the Nifty index can go up substantially from your strike price, and the higher it rises, the more you stand to benefit after deducting the premium that you have paid.

 

Calculating Loss in Nifty Calls Options

On the other hand, if the Nifty index itself does not go up higher than the strike price until the expiry date, your Call option will expire worthless. The loss you incur is only the premium you paid for the option.

 

Example: In continuation of the above example, if the Nifty index remains demurely below ₹17,000, your loss would be:

 

Loss = ₹50 (Premium) * 50 (Lot Size) = ₹2,500

 

Calculating Profit in Nifty Put Options

Put options, often used in strategies like the straddle option strategy, operate oppositely to Call options. Here, investors expect the Nifty index to fall below the strike price.

• Strike Price: This is a price at which you have the right to sell the Nifty index.
• Spot Price: The price refers to the current market price of the Nifty index.
• Differential: Strike Price - Spot Price
• Premium: Differential - Premium you paid for buying the option
• Lot Size: Again multiply with the lot size

Example: You have bought a Put with the strike price of ₹17,000, and the current spot price is ₹16,800. You have paid a premium of ₹40 per unit and the lot size is 50.

• Profit Per Unit = ₹17,000 (Strike Price) - ₹16,800 (Spot Price) - ₹40 (Premium)
• Profit Per Unit = ₹160
• Total Profit = ₹160 x 50 (Lot Size) = ₹8,000

Your profit in this example will be ₹8,000.

 

Calculating Loss in the Nifty Put Options

If the Nifty index does not go below the strike price, your Put Option will expire at the date of expiry, and the loss will be just the premium that you have paid.

 

Example: The Nifty index has stayed above ₹17,000. In this case, your loss would be:

• Loss = ₹40 (Premium) * 50 (Lot Size) = ₹2,000

 

Thus, you will lose ₹2,000 in this case.

 

Then again, much like in the case of Call options, the loss is limited to the amount of the premium paid, so that is indeed a facile advantage in terms of risk management.

Using Nifty Option Chain and Turtle Trading Insights

 

Analyzing the Nifty option chain can provide valuable insights into market trends, allowing for informed decision-making. Additionally, integrating techniques like turtle trading can help optimize trading strategies by identifying long-term trends and entry/exit points.

 

Conclusion

Calculating profit and loss in Nifty options helps an investor assess trades better, manage risks, and refine general trading strategy. The bottom line for success in the options market is knowing how to read your current financial status. However, you must remember that Nifty options require paying brokerage costs, STT, GST, Exchange Transaction Charges, Exchange Clearing Charges, SEBI Charges, and Stamp Duty.