NISM Certifications · NISM-Series-VIII: Equity Derivatives

Introduction to Options: formula sheet

Key formulas

Total premium paid: Total premium = Premium per unit × Lot size; Premium is quoted per unit of the underlying. Multiply by the lot size for the cash outlay.
Call buyer's rights: Long call = right to BUY at strike; Short call = obligation to SELL at strike if exercised; Buyer has the right. Seller (writer) has the obligation.
Put buyer's rights: Long put = right to SELL at strike; Short put = obligation to BUY at strike if exercised; A put writer may have to buy the underlying.
Maximum loss of option buyer: Maximum loss = Premium paid; Applies to both call buyers and put buyers.
Premium received by writer: Writer's maximum profit = Premium received; The writer's loss can be very large, since it depends on how far the price moves against the writer.

A call gives the buyer the right, not the obligation, to buy the underlying at the strike price.
A put gives the buyer the right, not the obligation, to sell the underlying at the strike price.
The buyer (holder) pays the premium; the seller (writer) receives it.
The buyer has a right; the seller has an obligation if the buyer exercises.
The strike price is the fixed price at which the underlying can be bought or sold on exercise.
European options can be exercised only at expiry; American options can be exercised any time up to expiry.
Call is in the money when spot is above strike; put is in the money when spot is below strike.
At the money means spot is equal or very close to the strike.
Intrinsic value of a call = greater of (spot − strike) and 0; of a put = greater of (strike − spot) and 0.
The buyer's maximum loss is the premium paid.
A buyer of a call expects the price to rise; a buyer of a put expects it to fall.
Options are traded in lots, so one contract covers the lot size, not one share.

Saying the option seller has the right to exercise. Fix: Only the buyer holds the choice. The seller must perform when the buyer exercises.
Confusing a put buyer with a put writer. Fix: Put buyer has the right to sell. Put writer has the obligation to buy if exercised.

Read whether the question asks about the buyer or the writer before reading the options.
Expect trap options that swap right and obligation, or call and put.
Remember that option buyers pay the premium and no margin, while option writers are required to pay margin (SPAN plus exposure margin).
For numerical questions, check whether the answer needs lot size multiplication.
Negative marking is 25% of the marks of the question. With four options, a blind guess has a small positive expected value, and every option you eliminate improves your odds. Still, guess only when you have a reason to prefer one option.