While trading in options, you might have heard about turnover, especially the sellers whose options trading margin depends on the turnover value. Also, the turnover value is useful in calculating brokerage and taxes. In all, turnover is the primary parameter for other option calculation, but how to calculate option turnover for income tax and other taxes?
In this article, let’s understand the concept of calculating option turnover value.
What is Option Turnover?
After the SEBI Margin Rule, Sept 2021, most of the traders have shifted towards options trading. This could be easily determined by analyzing the turnover value data on NSE where the option turnover value in equity alone is approximately 8 lakh crores in the month of March 2023.
In general,
Turnover = (Buying Value * Lot Size) – (Selling Value * Lot Size)
This helps in determining the profit or loss which is the total turnover value of the trade.
In the case of options, however, one more parameter is added to determine the turnover value. Hence,
Turnover in Options Trading = (Buying Value * Lot Size) – (Selling Value * Lot Size) + Sell Value
For turnover calculation in options trading, you will need to keep track of all of your trades over a given period with the following information:
- The date of the trade
- The type of option (call or put)
- The strike price of the option
- The expiration date of the option
- The premium you paid or received for the option
- The number of contracts traded
Once you have this information, you can calculate the total value of your trades during the period by adding up the premiums paid or received for each trade.
Option Turnover Calculation Example
To calculate turnover, you need to follow these steps:
- Premium of Selling
Determine the absolute value of the premium received from selling options contracts during the period under consideration. - Premium for Buying
Determine the absolute value of the premium paid for buying options contracts during the same period. - Total Premium
Find the sum of the total premium trade, i.e. premium for bought contracts and premium received for sold contracts. - Lot Size
The lot size refers to the number of units of the underlying asset that is represented by one options contract. - Turnover Calculation
The turnover is then calculated as the total premium traded multiplied by the lot size of the contract.
Let’s say option buyer A opened 5 positions in Nifty at the following value at different times in a year:
Option Trading Turnover Nifty Index Number of Lots Lot Size Total Buy Value (in INR) Total Sell Value (in INR) Gain or Loss (in INR) Turnover (in INR) Nifty 17000 CE 2 50 10,000 12,000 2,000 14,000 Nifty 17500 CE 2 50 10,000 8,000 (2000) 10,000 Nifty 18000 PE 2 50 12,000 15,000 3,000 18,000 Nifty 18500 CE 3 50 22,000 30,000 8,000 38,000 Nifty 18,200 PE 3 50 20,000 18,000 (2,000) 20,000 9,000 1,00,000
Turnover = Total Gain or Loss + Selling Value
It is important to note that turnover is used to determine tax liability and other regulatory obligations. Therefore, it is crucial to keep accurate records of all trades and their respective premiums to ensure compliance with regulations.
Why Do We Need Option Turnover?
Options trading comes under non-speculative trading hence the profit in options trading is considered as a business income. Thus, it is essential to consider the gain and loss in option trading along with the total turnover value of all the options traded throughout the year.
In case, you face a loss in the options trade, the corresponding amount gets deducted from the taxable income that helps you in saving tax.
Other than this, the turnover value of options helps you in :
- Evaluating trading activity: The higher turnover rate would show that the trader is engaging in frequent trading activity, which can be a sign of active management, on the other hand, a lower turnover rate may indicate that the trader is taking a more passive approach to investing.
- Checking the impact on trading costs: Most of the time, brokers charge some fees or commissions for each trade that a trader makes. As a result, frequent trading activity can result in higher trading costs which might eat into a trader’s profits.
Conclusion
Options trading opens a gateway to earning good profit in the shortest time but at the same time, there are fees and taxes associated with the trade. This makes it important for every trader to check how to calculate option turnover for income tax and file the ITR to avoid any kind of negative consequences.
If you are a beginner or looking forward to learning more about options trading or different types of trading, you can reach out to Stock Pathshala. We offer multiple stock market courses to help individuals have a deep analysis of trading and minimize the risk factor.
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