NISM Series V-D · Unit 8 of 12 · about 9% of the paper
Options: NISM Series V-D notes and practice questions
Calls, puts, premium, moneyness, payoffs, pricing drivers and Greeks.
What to know in Unit 8
- Call and put.
- Intrinsic and time value.
- Moneyness.
- Greeks.
Key terms, examples and exam traps
Call option
A call option gives the buyer the right, not the obligation, to buy the underlying at the strike price.
Example. A buyer pays premium for the right to buy at 100.
Exam trap. This statement is false: A call option gives the buyer the right to sell.
Put option
A put option gives the buyer the right, not the obligation, to sell the underlying at the strike price.
Example. A holder buys a put to protect a falling portfolio.
Exam trap. This statement is false: A put option gives the buyer the obligation to sell.
Option premium
The premium is the price paid by the buyer to the seller of the option and is the buyer's maximum loss.
Example. A buyer pays ₹50 per unit and can lose at most that.
Exam trap. This statement is false: The buyer of an option can lose more than the premium.
Writer's risk
The option seller earns the premium but can face large or unlimited loss, so must keep margin.
Example. A call writer loses if the price rises sharply.
Exam trap. This statement is false: An option writer's loss is limited to the premium.
Strike price
The strike is the fixed price at which the option holder can buy or sell the underlying.
Example. A call with a strike of 18,000 on the index.
Exam trap. This statement is false: The strike changes every day.
European and American
A European option can be exercised only at expiry while an American option can be exercised any time before expiry, and index options in India are European.
Example. Nifty options are exercised at expiry.
Exam trap. This statement is false: Index options in India are American.
Moneyness
A call is in the money when spot is above strike, at the money when equal and out of the money when below, and the reverse for a put.
Example. A call with strike 90 when spot is 100 is in the money.
Exam trap. This statement is false: A call is in the money when spot is below strike.
Intrinsic and time value
Premium equals intrinsic value plus time value, and time value falls to zero at expiry.
Example. An in-the-money option has intrinsic value plus time value.
Exam trap. This statement is false: An out-of-the-money option has intrinsic value.
Long call payoff
A long call's profit at expiry is the greater of spot minus strike and zero, less the premium.
Example. Strike 100, spot 120, premium 5 gives a profit of 15.
Exam trap. This statement is false: A long call's profit is limited to the premium.
Breakeven
The breakeven for a long call is the strike plus premium, and for a long put it is the strike minus premium.
Example. A call at strike 100 and premium 5 breaks even at 105.
Exam trap. This statement is false: The breakeven of a long call is strike minus premium.
Delta
Delta shows how much the option price changes for a unit move in the underlying.
Example. A call delta of 0.5 gains about 0.5 for each 1 rise.
Exam trap. This statement is false: Delta measures time decay.
Theta
Theta shows the loss of option value as time passes, hurting option buyers.
Example. An option loses value each day while spot is unchanged.
Exam trap. This statement is false: Theta benefits option buyers as time passes.
Vega
Vega measures the sensitivity of an option's price to changes in volatility, and higher volatility increases option prices.
Example. An option gains when volatility rises.
Exam trap. This statement is false: Higher volatility reduces the value of all options.
Put-call parity
Put-call parity links call, put, spot and the present value of strike for European options with the same strike and expiry.
Example. Mispricing between a call and put creates an arbitrage chance.
Exam trap. This statement is false: Put and call prices are independent of each other.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Put option”?
- Investors can complain to the AMC, then to SEBI's complaint system and use online dispute resolution if unresolved.
- A holder of bonds fears a rise in yields and hedges by selling interest rate futures to offset the fall in bond values.
- A put option gives the buyer the right, not the obligation, to sell the underlying at the strike price.
- A long-short equity fund buys stocks expected to rise and uses futures or options to short those expected to fall, reducing market exposure.
Q2. Which term is described here? The option seller earns the premium but can face large or unlimited loss, so must keep margin.
- Bull call spread
- Strike price
- Beta
- Writer's risk
Q3. Which term is described here? A European option can be exercised only at expiry while an American option can be exercised any time before expiry, and index options in India are European.
- European and American
- Basis risk in IRF
- Interest rate options
- Standard deviation
Q4. Which statement best describes “Strike price”?
- If market movement reduces an investor's holding below ₹10 lakh, the investor can only redeem the entire remaining amount rather than part.
- Gains on equity-oriented funds are short-term if sold within 12 months, taxed at 20%, and long-term above that, taxed at 12.5% above ₹1.25 lakh in a year (as at writing).
- Selling futures against a stock portfolio offsets losses on the portfolio if the market falls, though it gives up gains on a rise.
- The strike is the fixed price at which the option holder can buy or sell the underlying.
Q5. Which statement best describes “Option premium”?
- A futures price is the spot price plus the cost of carrying the asset to the future date, so futures normally trade above spot in the usual case.
- A distributor needs an AMFI Registration Number to sell funds, and an EUIN identifies the employee or sales person who gave advice.
- The premium is the price paid by the buyer to the seller of the option and is the buyer's maximum loss.
- Distributors must act with honesty and care, avoid mis-selling, keep client information confidential and disclose commissions.
Q6. Which term is described here? Put-call parity links call, put, spot and the present value of strike for European options with the same strike and expiry.
- Exit load
- Key Information Memorandum
- Index uses
- Put-call parity
Frequently asked questions
How much of NISM Series V-D comes from Unit 8?
Unit 8 (Options) usually carries about 9% of the questions. The whole exam has 150 questions and the pass mark is 60%.
What should I study in NISM Series V-D Unit 8?
Call and put. Intrinsic and time value. Moneyness. Greeks.
Are these NISM Series V-D practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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