NISM Certifications · NISM-Series-VIII: Equity Derivatives
Introduction to Options for NISM Equity Derivatives
An option is a contract that gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying at a fixed strike price on or before expiry. The buyer pays a premium. The seller is obliged to perform if the buyer exercises. Solve questions by identifying the position first, then the payoff.
What this chapter covers
This chapter introduces the option contract. You learn what a call and a put are, who the buyer (holder) and seller (writer) are, and what words like strike price, premium, expiry date, underlying, lot size, exercise and assignment mean. You also learn the difference between European and American style options, and the idea of being in the money, at the money or out of the money.
It sits early in the paper because later chapters build on it. Payoff diagrams, option strategies, option pricing and its sensitivities (the Greeks), and trading and settlement of options all assume that you can read a position correctly. If you confuse a long put with a short call here, every later question on that position will go wrong.
The chapter has only one topic, Options Basics and Terminology, but it is dense with definitions. Questions are mostly direct. They test whether you know the exact meaning of a term and can apply it to a simple position.
Option questions appear across the paper, and almost all of them depend on the vocabulary and the buyer versus seller logic taught here. NISM Series VIII has 100 questions, a 60% pass mark and negative marking of 25% of the marks assigned to a question, so a wrong answer costs you. Definition questions are the easiest marks to secure if your basics are exact, and the same clarity helps you avoid wrong answers in the harder payoff and strategy questions later.
Introduction to Options: topics in the order to study them
- 1Options Basics and TerminologyIt is the only topic in this chapter and the base for payoffs, strategies and pricing, so learn it fully before moving on.
How to prepare Introduction to Options
Treat this chapter as a vocabulary and logic exercise. Aim for exact definitions and quick, correct position-reading.
- Read the topic once and list every term: call, put, buyer, seller, strike, premium, expiry, underlying, lot size, exercise, assignment.
- Write each definition in one line of your own words. Check that rights and obligations are assigned to the correct party.
- Build a small grid with four positions: long call, short call, long put, short put. For each, note the view on the market, who pays or receives premium, and whether risk is limited or unlimited.
- Learn European versus American exercise, and note that the style tells you when exercise is allowed.
- Practise moneyness. For a call, compare spot with strike; for a put, reverse it. Do several examples with different spot and strike values.
- Compute the intrinsic value of simple options as the greater of zero and the in-the-money amount, and separate it from the premium paid.
- Attempt MCQs and review each wrong answer. Note whether the error was in the term, the party or the direction.
Common mistakes in Introduction to Options
Saying the option buyer is obliged to buy or sell on expiry.
Fix: Remember that only the seller (writer) carries an obligation. The buyer holds a right and can let the option lapse.
Mixing up moneyness for puts.
Fix: For a put, in the money means spot is below strike. Test with the question: would exercising give a gain?
Treating premium as the intrinsic value.
Fix: Intrinsic value is only the in-the-money amount, never below zero. Premium is the price paid and can include more than intrinsic value.
Confusing who pays and who receives the premium.
Fix: The buyer always pays the premium upfront and the seller always receives it, for both calls and puts.
Mixing European and American exercise.
Fix: Link European with expiry only and American with any time until expiry, and read the question's style carefully.
Ignoring lot size when computing amounts.
Fix: Multiply by the lot size when the question asks for the total amount for a contract.
Last-day revision: Introduction to Options
- 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.
Introduction to Options practice questions
- In the context of exchange-traded index options in India, which statement correctly describes the position of an option writer (seller)?
- Which statement about the relationship between a European call option's premium and volatility of the underlying, other things equal, is cor…
- An investor sells a put option on a stock with a strike of Rs 500 and receives a premium of Rs 18. The lot size is 1,000 shares. What is the…
- Which of the following statements about the Indian index options traded on the exchanges is correct?
- In the options market, the term 'writer' of an option refers to the party who:
- In the options market, the term 'option premium' refers to which of the following?
- A Nifty call option with strike 22,000 is trading at a premium of Rs 180 when Nifty spot is 22,100. What is the time value of this option?
- A stock trades at Rs 540. A call option with strike Rs 520 is quoted at a premium of Rs 31. What are its intrinsic value and time value resp…
Introduction to Options in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Introduction to Options: frequently asked questions
What is the difference between a call option and a put option?
A call gives the buyer the right to buy the underlying at the strike price. A put gives the buyer the right to sell it at the strike price. In both cases the buyer pays a premium and the seller takes on the obligation.
Who has unlimited risk in an option contract?
The buyer's loss is limited to the premium paid. The seller of a call has theoretically unlimited loss, since the price can keep rising. The seller of a put has a large but limited loss, because the price cannot fall below zero.
How do I know if an option is in the money?
Compare spot with strike. A call is in the money when spot is above strike. A put is in the money when spot is below strike. If they are equal or very close, the option is at the money.
Is there negative marking in NISM Series VIII?
Yes. A wrong answer carries negative marking of 25% of the marks assigned to that question. The exam has 100 questions, 100 marks, 2 hours and a pass mark of 60%, so avoid blind guesses.