Trading in options is a tricky issue and therefore, you must do your homework before you take any decisions about selling or exercising of options. Lets understand how to calculate the profit in the above example.
Option Premium = 40 and Reliance Lot Size = 150
Total premium outgo = 150 x 40 = 6000
Spot Price = 2300
Amount Receivable on the day of exercise = (Lot Size) x (Spot price Strike Price) = (2300 2250) = 150 x 50 = 7500
Gross profit = 7500 6000 = 1500
Net Profit = Gross profit Expenses
Expenses include the following items
1. Brokerage + Service Tax and Education Tax on brokerage: In the very recent past, brokers were charging brokerage on options as certain percentage of transaction value (notional contract value). As per the new guidelines of SEBI, brokers can charge brokerage at the flat rate of Rs.100 per contract or at the rate of 2.5% on the premium amount whichever is higher. In the above example, your broker can charge you 2.5% of premium amount 6000, that is, 150 on the buy side and 2.5% of 7500, that is, 225 on the sell transaction. Therefore, your brokerage works out to 150 +225 = 375. If you add service tax and education cess at the rate of 10.3% on the brokerage amount, the total brokerage expenses work out to 375 + (10.3% of 375) = 413.65
2. STT (Securities Transaction Tax): STT on options is again a very tricky issue. If you exercise the option, you have to pay STT at 0.125% of notional contract value. However, if you square it off (by entering into a sale transaction on or before the expiry date), you have to pay STT at 0.017% of premium amount. In the above example, if you exercise the option, STT = 0.125% of (2300 x 150) = 431.25. If you square it off before the expiry date, STT = 0.017% of (150 x 50) = 1.275. Please note that in most of the cases, it is better to square off options instead of exercising.
3. Other charges: Other charges may include stamp duty, transaction charges of the exchange and turnover taxes. You should find out the details about other charges from your broker.
Now, in connection with STT, I will share with you an interesting example in which I had incurred loss due to my ignorance about the latest amendments to payment of STT and I ended up paying STT more than the gross profit amount.
On the day of expiry, right in the morning, I had bought 12 lots of NIFTY Call Option with a strike price of 4300 at an average price of 11.575. Instead of squaring off the position during market hours, I allowed it to remain open. The settlement price of NIFTY turned out to be 4315.85. Now, lets calculate the profit.
Total premium outgo = 600 (12 lots x 50) x 11.575 = 6945
Total Receivable = (4315.85 4300) x 600 = 9510
Gross Profit = 9510 6045 = 2565
STT = 0.125% of (4315.85 x 600) = 3237
Nett Loss = 2565 3237 = 672
Please note that the loss excludes the brokerage and other expenses.
