NISM-Series-X-A: Investment Adviser (Level 1) · Securities Market Segments

Derivatives Market: Futures and Options Explained for NISM X-A

Q: What is the difference between futures and options?

A futures contract binds both buyer and seller to trade at a fixed price on expiry. An option gives only the buyer a right, and the writer has the obligation if the buyer exercises. The option buyer pays a premium, and the maximum loss is limited to it.

Q: How does margin work in futures trading in India?

You deposit an upfront margin with your broker, which passes it to the clearing corporation. Daily mark-to-market gains and losses are settled against it. If your balance falls too low, you must top up.

Q: 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 at the strike price. Buyers of calls expect prices to rise, and buyers of puts expect prices to fall.

Q: Do I need to memorise NSE lot sizes for the NISM exam?

No. Lot sizes are revised by the exchange from time to time. Understand what a lot is and how to compute contract value from the data given in the question.

Updated 11 October 2026 · Fact-checked

Futures and options are exchange-traded derivatives whose value depends on an underlying such as an index or stock. A futures contract obliges both sides to trade at a fixed price on expiry. An option gives the buyer a right, not an obligation. Solve questions by identifying the position, then the payoff or margin.

Understand Derivatives Market: Futures and Options

A derivative is a contract whose value comes from an underlying asset, such as the Nifty 50 index or a share. In India, exchange-traded derivatives trade on exchanges like NSE and BSE. A clearing corporation guarantees performance, so you do not face the other party's default risk directly.

A futures contract is an agreement to buy or sell the underlying at a fixed price on a future date. Both the buyer and the seller are bound. If the price moves your way you gain. If it moves against you, you lose. Profit and loss are theoretically unlimited on both sides. Futures are marked to market daily, so gains and losses are settled every day.

An options contract gives the buyer a right, but not an obligation. A call option gives the right to buy at the strike price. A put option gives the right to sell at the strike price. The buyer pays a premium to the seller (writer). The buyer's maximum loss is the premium. The writer receives the premium but can face large losses. Index options in India are European style, so they can be exercised only on expiry. Stock derivatives are settled physically, while index derivatives are cash settled.

Every contract has standard specifications: underlying, expiry date, lot size (the minimum quantity per contract) and tick size. Lot sizes are set by the exchange under SEBI's framework and are revised from time to time. So never memorise a lot size for the exam. Learn that a lot is the minimum tradable unit and contract value is price × lot size.

Traders must deposit margin with the broker. Futures margin is a good-faith deposit, not a fee. It typically includes initial margin (based on risk of loss) and extreme loss margin, plus mark-to-market settlement daily. Option buyers pay the premium upfront and no margin. Option writers pay margin. Uses: hedging (reduce risk of an existing position), speculation (take a view for profit) and arbitrage (exploit price gaps).

Key formulas to remember

Contract value: Contract value = Futures price × Lot size; Notional exposure of one lot. Multiply by number of lots for the full position.
Futures profit/loss (long): P&L = (Price at exit − Entry price) × Lot size × Number of lots; For a short futures position, reverse the sign: (Entry − Exit).
Call buyer payoff at expiry: Payoff = max(Spot − Strike, 0) − Premium, per unit; Maximum loss is the premium paid. Profit is unlimited. Multiply by lot size.
Put buyer payoff at expiry: Payoff = max(Strike − Spot, 0) − Premium, per unit; Maximum loss is the premium. Maximum profit occurs if spot falls to zero.
Option writer payoff: Writer's payoff = − (Buyer's payoff); Derivatives are a zero-sum game between buyer and writer, before costs.
Breakeven: Call: Strike + Premium. Put: Strike − Premium; Spot price at expiry where the buyer neither gains nor loses.
Moneyness: Call ITM if Spot > Strike. Put ITM if Spot < Strike. ATM if Spot = Strike; Intrinsic value of an ITM option is the gap between spot and strike. OTM options have zero intrinsic value.

How to solve Derivatives Market: Futures and Options questions

Use this method for any question on futures, options, margins or specifications.

1Identify the instrument: futures (obligation both sides) or option (right for the buyer only).
2Identify your position: long or short, call or put, buyer or writer.
3Note the lot size, number of lots and whether quantities are per unit or per lot.
4Apply the right payoff formula. For options, compute intrinsic value at expiry first, then subtract the premium.
5Check the sign: for a short futures or option writer, reverse the buyer's result.
6For margin questions, remember margin is a deposit, mark-to-market is settled daily, and option buyers pay no margin.
7Compare your answer with the options and eliminate those that break a basic rule, such as a limited-loss claim for a writer.

Quickest way: Right or obligation, then payoff per unit

When to use it: Use for any conceptual or numerical MCQ when time is short.

Ask: who has the obligation? Futures: both. Option: only the writer.
Max loss: option buyer = premium. Writer and futures parties = potentially large.
For payoff, compute per unit first, then multiply by lot size.
Breakeven: call = strike + premium, put = strike − premium.
Reject any option that says option buyers pay margin or that futures give a right only.

Common mistakes in Derivatives Market: Futures and Options

Saying an option buyer has an obligation to trade.
You mix up futures and options.
Fix: Remember: buyer has the right, writer has the obligation. In futures, both have obligations.
Forgetting to subtract the premium from the payoff.
You compute only intrinsic value.
Fix: Net payoff for a buyer = intrinsic value − premium. Do this in every option calculation.
Forgetting to multiply by lot size.
Questions quote prices per unit.
Fix: Check whether the answer asks per unit or per lot, and multiply by lots held.
Treating margin as a fee or cost.
The word sounds like a charge.
Fix: Margin is a refundable good-faith deposit with the broker and clearing corporation. Losses are debited from it.
Thinking option buyers pay margin.
You apply futures rules to options.
Fix: The buyer pays only the premium upfront. Margin applies to writers.
Memorising a lot size as a fixed number.
Lot sizes appear in notes and online.
Fix: Lot sizes are revised by the exchange, so rely on the question's data. Use the definition and the contract value formula.

Worked examples

Example 1

A trader buys 2 lots of a stock futures contract at ₹500. Lot size is 400 shares. On expiry the settlement price is ₹520. What is the profit?

Show the solution

Position is long, so profit per share = 520 − 500 = ₹20.
Total quantity = 2 × 400 = 800 shares.
Profit = 20 × 800 = ₹16,000.

Answer: ₹16,000 profit

Example 2

An investor buys a call option on a stock with strike ₹1,000 at a premium of ₹30. Lot size is 250. At expiry the stock closes at ₹1,060. What is the net profit per lot, and what is the breakeven price?

Show the solution

Intrinsic value = max(1,060 − 1,000, 0) = ₹60 per share.
Net payoff per share = 60 − 30 = ₹30.
Net profit per lot = 30 × 250 = ₹7,500.
Breakeven = strike + premium = 1,000 + 30 = ₹1,030.

Answer: Net profit ₹7,500 per lot; breakeven ₹1,030

Exam tips

Expect conceptual questions on right versus obligation, and who pays margin or premium.
In payoff questions, always check whether the premium has been subtracted and whether lot size applies.
Questions on hedging usually involve an existing holding: a long stock holder hedges by selling futures or buying puts.
Do not rely on remembered lot sizes. Use data in the question, since exchanges revise them.
With negative marking, skip only if you cannot eliminate two options.

Practice questions from Securities Market Segments

Derivatives Market: Futures and Options in other exams

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

Derivatives Market: Futures and Options: frequently asked questions

What is the difference between futures and options?

A futures contract binds both buyer and seller to trade at a fixed price on expiry. An option gives only the buyer a right, and the writer has the obligation if the buyer exercises. The option buyer pays a premium, and the maximum loss is limited to it.

How does margin work in futures trading in India?

You deposit an upfront margin with your broker, which passes it to the clearing corporation. Daily mark-to-market gains and losses are settled against it. If your balance falls too low, you must top up.

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 at the strike price. Buyers of calls expect prices to rise, and buyers of puts expect prices to fall.

Do I need to memorise NSE lot sizes for the NISM exam?

No. Lot sizes are revised by the exchange from time to time. Understand what a lot is and how to compute contract value from the data given in the question.