Trading and long term equity appreciation options

If you showed these as trades business income you have to pay taxes on any appreciation based on the regular income tax slab you fall in. This had led to so many litigations in the past. Finally the income tax department has brought in clarity in classifying yourself as a trader or an investor through this CBDT circular , which states:. An individual can decide on his own to either show his stock investments as capital gains or as a business income irrespective of the period of holding the listed shares and securities.

Whatever is the stance once taken, the taxpayer will have to continue with the same in the subsequent years. We have updated the module on markets and taxation on Varsity. So one ambiguity out of the picture, hopefully the IT department will soon clear out confusion around audit requirement for traders. I am not sure if IT dept has clarified it fully, especially for short-term capital gains.

Clause a says that the investor has the option to treat any trade as capital gains or business income. Still the ambiguity is there whether a trader can show his short term trades as capital gains. What happens in this scenario i am doing both investment in shares and also options trading… Am actually a equity investor but for few times try out fno options… How should i file return?

Which form to use? You will have to use ITR 4 to show option trading which is a business income. 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.

The exact way you implement these hedging techniques will depend on how much you want to spend to protect your position and what level of protection you desire. This requires some in depth thought and is why we only recommended that more experienced traders undertake this aspect of the strategy. The benefits of the stock replacement strategy using options are relatively clear.

Beginner investors can certainly use it as a simple alternative to buying shares if they want to reduce the maximum possible loss or take advantage of the power of leverage. For more experienced traders the ability to be able to hedge the position if circumstances change and choose to what extent the position is hedged can be very appealing. Stock Replacement Using Options The stock replacement strategy is essentially exactly what the name suggests.

Section Contents Quick Links. Using the Stock Replacement Strategy The basic idea of the stock replacement strategy using options is that instead of buying stock that you have highlighted as being a worthwhile investment, you buy calls with stock as the underlying security.

Benefits Related to Leverage Using options as a stock replacement strategy helps to unlock the potential of leverage.