Options Brokerage Calculator: Essential Tool for Options Trader

Options trading has been picking up in India recently, with 35% of the trades being made by retail investors. On top of that Indian investors traded 85 billion options contacts just in 2023.😲That's more than any other country in the world! Quite a feat, right?

While options trading seems like a pretty attractive trading opportunity, it also comes with a cost. 
A successful options trade isn't only about picking the right contracts and timing your entries and exits perfectly. It's also about understanding the costs that tag along for the ride. Not knowing what a trade will cost can become a bad trading experience for a new options trader and a seasoned one, too.

With more and more investors trying their hand at options trading, it has become even more important to know how much options trading really costs.

And…you guessed it right. There's a tool for that. It's called an Options Brokerage Calculator, and here's everything you need to know about using one.

Table of Contents

1. What are Options, and how do they work?
2. How is brokerage calculated on options?
3. Importance of understanding options brokerage charges
4. How to Use an Option Brokerage Calculator
5. Factors Affecting Option Brokerage
6. Option Charges of different brokers

What are Options, and how do they work

Have you ever used the 'lock this price' option while booking flights? This way:

• You pay a small fee and get the chance to buy the ticket at a certain price. 
• Then, even if the price of the ticket increases, you can get them at the locked price.
• In case your plans get cancelled, and you decide not to buy the tickets, you only lose the token amount.

Likewise, options give you the right, but not the obligation, to buy or sell securities at a specific price before a certain date.

Key Components of Options

1. Underlying Asset: The asset on which the option is based (e.g., stocks, commodities, indices).
2. Strike Price: The predecided price at which you can buy or sell the underlying asset.
3. Expiration Date: The date on which the option expires.
4. Premium: The price you pay to the seller of the option.

Types of Options

1. Call Options: Gives the holder the right, but not the obligation, to buy the underlying security at strike price on or before the expiration date. It works in the holder's favour when the price of the underlying security rises. 
2. Put Options: Gives the holder the right, but not the obligation, to sell the underlying security at strike price on or before the expiration date. It works in the holder's favour when the price of the underlying security falls.

If things don't go well, you only lose the premium.

How is brokerage calculated on options?

Brokerage on options is calculated by adding all the applicable fees and charges:

1. Options Brokerage Rate: Brokers charge a fee per order. It is either a fixed rate or a percentage of turnover.
2. Securities Transaction Tax (STT): This is a tax on buying and selling securities. STT only applies when you sell and not when you buy. 
3. Exchange Charges: Fees charged by the stock exchange for processing the trade.
4. Goods and Services Tax (GST): It is a tax charged for the services provided by your broker, calculated as a percentage of the brokerage plus exchange charges.
5. SEBI Charges: The charges levied by the Securities and Exchange Board of India.
6. Stamp Duty Charges: This is a type of state tax which is charged on the transaction and is based on a percentage of the sales.

Importance of Understanding Options Brokerage Charges

1. High Cost: Brokerage charges eat into your profits. So, if you know what an options trade will cost, you can easily manage your trading costs.
2. Trade Decisions: When you know how much a trade will cost, you have access to one more factor that will help you make good investments. 
3. Broker Comparison: Trade costs differ per broker, so knowing how much a trade will cost can help you pick the right broker.
4. Profitability Analysis: Understanding trade costs helps you calculate real profits, so you can make sure if a trade is actually bringing you profit or not. 
5. Investment Strategy: You can adjust your investment strategy to get the most profits out of your options trades.

How to Use an Option Brokerage Calculator?

Let me tell you the step-by-step process of how you can use an options brokerage calculator. Here, let us consider the Zerodha Brokerage Calculator:

Let’s suppose you want to buy 100 option contracts at ₹780 each. So, you enter these values into the options brokerage calculator:

• Quantity: 100
• Price: ₹780
• Order Type: Buy
• Exchange: NSE

The brokerage calculator will give you the turnover value for this trade

• Turnover: Quantity × Contract Price 
• Turnover: 100 * ₹780 = ₹78,000

And now, onto the brokerage calculation!

• Options Brokerage Rate: Zerodha charges a flat fee per order, regardless of the trade size, let's say ₹20 per order. So, you will have to pay a brokerage fee of ₹20.00.
• Securities Transaction Tax (STT): Since you are placing a buy order, STT will be ₹0.00.
• Exchange Charges: In this example, applicable exchange charges are ₹41.34.
• Goods and Services Tax (GST): For this trade, the GST charges will be = 18% (Brokerage + Exchange Charges)
• GST = 18% * (₹20 + ₹41.34) = ₹11.04
• SEBI Charges: For this trade, the SEBI Charges = 0.0001% of the Turnover.
  • = 0.0001% of ₹78,000 = ₹0.04
• Stamp Duty Charges: For this trade, the Stamp Duty = 0.003% of ₹78,000 = ₹2.34

Total Tax and Charges: The sum of all applicable charges

Net Debit: The total amount deducted from your account, including the turnover and all charges: ₹78,000 + ₹74.76 = ₹78,074.76
You may think you only have to pay ₹78,000 for this trade, but no, you also have to pay an extra ₹74.76 in brokerage fees.

Factors Affecting Option Brokerage

1. Type of Option: Usually, brokers charge the same fee for a call or put option trades, so the type of option does not affect option brokerage charges, but the charges may differ across brokers.
   Calculate charges for different brokers here. 
2. Option Expiry: When it comes to options, the expiration date usually doesn't change how much you pay in brokerage fees. However, options that last longer might be easier or harder to buy and sell, which can affect how you trade them.
3. Underlying Asset Price: The price of the asset can affect the brokerage charges if your broker charges a fee as a percentage of the trade value. The higher the trade value, the higher your brokerage fee. 
4. Option Premium: If your broker charges a premium as a percentage of the trade value, you might be taking on more risk. The higher the trade value, the higher your premiums.

Option Charges of Different Brokers

Conclusion

Now, you know everything you need to know about options, options brokerage and options broker calculator. Put this information to good use, and remember to use an options brokerage calculator the next time you take part in an options trade.

Head to Select's brokerage calculators list and compare what different brokers are charging you. The stock market is a whole world of unknowns, so do away with as many uncertainties as possible to make sure your trades are as risk-free as they can get.