While it comes to calculation, there are 2 things we have to learn – how to calculate the break even point of an option and how profits/losses are calculate. Calculation of break even explained in our next article.
Let’s go with an example, nifty to understand better how profits and losses are calculated in options trading. The lot size of nifty is 50 shares in number irrespective of call or put. The profit/loss does not depend on the type of call (nifty call option or nifty put option), expiry or strike price. It directly depends only on premium which trader selects while purchasing the option.
For instance, if 1 lot of nifty call 5600 is bought at 88. The investment required to purchase this option is approximately Rs.4400 (50 x 88 = 4400) leaving brokerage and other costs. If the same option is sold at 120, the profit in terms of points is around 32 (120-88). Now its pretty simple that multiplying the number of shares with the difference premium (32) gives us the profit (50 x 32= Rs.1600) per 1 lot. Exact calculation goes with the PUT option too as even in case of nifty put, same kind buying takes place.
coming to the loss side, the maximum loss one can get with the above put option is Rs.4400 as that is the maximum loss trader agreed to spare at the time of buying. So even if nifty collapses huge in the other direction of your nifty call or nifty put, the maximum loss is limited. This is the area where option trading stands special when compared to other types of trading.