Trading and long term equity appreciation options
You will have to use ITR 4 to show option trading which is a business income. You can show equity investments under capital gains. Please clarify me if my income not taxable and I book loss in both equity and option section so then.
ITR 4 More here: My bad 29th Feb. While filing the return show your equity investments under capital gains. It automatically means you are an investor. Classifying your equity trades as investments or business. Finally the income tax department has brought in clarity in classifying yourself as a trader or an investor through this CBDT circular , which states: Nithin, I am not sure if IT dept has clarified it fully, especially for short-term capital gains.
Only business like any shop keeper. Make sure to read through varsity. I also think they have not made it clear for short term capital gains. Please read this page if you aren't. A delta value of 1 means that the price of the deep in the money calls should move approximately in line with the price of the underlying security.
Therefore owning these contracts is effectively recreating the position of owning the actual underlying stock. We highlight how this works in the below example.
As you can see, the net effect in absolute terms of the price changes is approximately the same from owning the calls as it is from owning the shares. Person B has recreated the position of Person A without actually buying any of the stock. It's also apparent from the above example that Person B has invested significantly less than Person A. This is one of the main advantages of the stock replacement strategy.
Using options as a stock replacement strategy helps to unlock the potential of leverage. As we pointed out in the example we provided above, Person B has spent less on their investment than Person A. They can still benefit at roughly the same rate from any increase in the price of Company X shares though.
The ability to make similar amounts of money with less investment is an obvious advantage, and it's a primary reason why many people are choosing to buy options as an alternative to the underlying security. You get the full benefit of any appreciation in the security, but have invested less. You have the potential to make a higher return relative to the amount invested. Additionally to this, the maximum possible loss is reduced. If you like using simple strategies, then these advantages are really all you need to know about the stock replacement strategy.
There are, however, further advantages too, but it gets a little more complicated if you wish to take advantage of them.
Another benefit of this strategy is that it can be used to hedge a position. This isn't something that we advise beginners or inexperienced traders and investors to attempt, but it may appeal to those with some decent experience behind them.
The basic principle is that you can use the money you effectively save by buying calls instead of the underlying stock to hedge against the possibility of the price of the stock falling or remaining the same. You can do this writing out of the money call options or short selling the underlying stock.
Typically you would do the former if you wanted to hedge against a small drop or no move at all, and the latter if you wanted to hedge against a significant drop.