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NISM-Series-VIII: Equity Derivatives · Introduction to Options

Options Basics and Terminology for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

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 (writer) has the obligation if the buyer exercises. Solve questions by identifying buyer or seller, call or put.

Understand Options Basics and Terminology

An option contract is a derivative whose value depends on an underlying, such as a stock or an index. It gives one party a right and puts an obligation on the other party.

The buyer (holder) pays a price called the premium to get the right. The buyer can choose to use the right or let it lapse. The most the buyer can lose is the premium paid. The seller (writer) receives the premium and must perform if the buyer exercises. The seller's risk can be large.

A call option gives the buyer the right to buy the underlying at the strike price. A put option gives the buyer the right to sell the underlying at the strike price. A call buyer expects the price to rise. A put buyer expects it to fall.

The strike price (exercise price) is the fixed price at which the underlying can be bought or sold. The expiry date is the last day the contract is valid. The lot size is the fixed number of units in one contract, set by the exchange. Premium is quoted per unit, so the total premium is premium × lot size.

In a futures contract, both parties are obliged to transact at expiry. In an option, only the seller is obliged. A futures buyer can gain or lose substantially as the price moves, whereas an option buyer's loss is limited to the premium. Futures need margin from both sides. Option buyers pay the premium and no margin; option writers are required to pay margin (SPAN plus exposure margin).

Key formulas to remember

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.

How to solve Options Basics and Terminology questions

Use the same sequence for any terminology or concept question on options.

  1. 1Find who the question is about: buyer (holder, long) or seller (writer, short).
  2. 2Find the type: call (right to buy) or put (right to sell).
  3. 3Match the term: strike is the fixed price, premium is the price of the option, expiry is the last date, lot size is units per contract.
  4. 4Decide who has the right and who has the obligation. Only the buyer has the right.
  5. 5For numbers, convert per-unit values to contract values by multiplying by lot size.
  6. 6Check limits: buyer's loss is capped at premium; writer's gain is capped at premium.
  7. 7Eliminate options that mix up buyer and seller or call and put.

Quickest way: Right-Obligation-Premium check

When to use it: Use for definition-type MCQs where options look similar and time is short.

  1. Ask: who pays premium? The buyer. Who receives it? The writer.
  2. Ask: who has the right? The buyer. Who has the obligation? The writer.
  3. Call means buy, put means sell, from the buyer's point of view.
  4. Reverse the action for the writer: a call writer may have to sell, a put writer may have to buy.
  5. Pick the option that matches all four points.

Common mistakes in Options Basics and Terminology

  • Saying the option seller has the right to exercise.

    Students link the word 'option' with choice for both sides.

    Fix: Only the buyer holds the choice. The seller must perform when the buyer exercises.

  • Confusing a put buyer with a put writer.

    Both are linked to 'put' and the word 'sell' appears in both definitions.

    Fix: Put buyer has the right to sell. Put writer has the obligation to buy if exercised.

  • Thinking the buyer pays margin and the writer pays premium.

    Students mix up the cash flows of futures and options.

    Fix: The buyer pays premium. The writer receives premium and pays margin.

  • Treating the premium as the strike price.

    Both are prices quoted in the option chain.

    Fix: Strike is the price for the underlying deal. Premium is the price of the option itself.

  • Forgetting lot size when calculating the premium outlay.

    Premium is quoted per unit, so students stop at that figure.

    Fix: Always multiply premium per unit by the lot size for the total amount.

  • Saying a futures buyer and an option buyer have the same obligation.

    Both are called 'long' positions.

    Fix: A futures buyer is obliged to transact at expiry. An option buyer is not.

Worked examples

Example 1

An investor buys a call option on a stock with a strike of ₹500 at a premium of ₹12 per share. The lot size is 250. What is the total premium paid and the investor's maximum loss?

Show the solution
  1. The investor is the buyer of a call, so the investor pays premium.
  2. Total premium = ₹12 × 250 = ₹3,000.
  3. A buyer's maximum loss is the premium paid.
  4. So the maximum loss is ₹3,000, if the option expires worthless.

Answer: Total premium paid is ₹3,000, and the maximum loss is ₹3,000.

Example 2

Which of the following describes the writer of a put option? (A) Has the right to sell at the strike price (B) Has the obligation to buy at the strike price if the buyer exercises (C) Pays the premium to the buyer (D) Has the right to buy at the strike price

Show the solution
  1. The writer is the seller, who receives the premium. So (C) is wrong.
  2. A put gives the buyer the right to sell. That right belongs to the buyer, not the writer, so (A) is wrong.
  3. (D) describes a call buyer, so it is wrong.
  4. The writer must buy at the strike price if the put buyer exercises. This is (B).

Answer: (B) The put writer has the obligation to buy at the strike price if the buyer exercises.

Exam tips

  • 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.

Practice questions from Introduction to Options

Options Basics and Terminology in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Options Basics and Terminology: frequently asked questions

What is an option contract?

An option is a derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying at a fixed strike price on or before expiry. The buyer pays a premium for this right. The seller takes on the obligation.

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. A call buyer expects prices to rise and a put buyer expects them to fall.

What is the difference between futures and options?

In futures, both parties are obliged to transact at expiry. In options, only the seller is obliged, while the buyer has a choice. The option buyer pays a premium and risks only that amount.

What is lot size in options?

Lot size is the fixed number of units of the underlying in one contract, decided by the exchange. You can trade only in multiples of the lot size. Total premium equals premium per unit multiplied by lot size.