NISM Series VIII · Unit 5 of 10 · about 3% of the paper
Option trading strategies: NISM Series VIII notes and practice questions
Combining options and underlying positions shapes the risk and reward. A short unit worth three marks.
What to know in Unit 5
- Covered call, protective put, spreads, straddle, strangle.
Key terms, examples and exam traps
Covered call
A covered call holds the underlying and sells a call against it, earning the premium but capping the upside.
Example. An investor holding shares sells a call to earn income.
Exam trap. This statement is false: A covered call has unlimited upside.
Protective put
A protective put buys a put against a held position, setting a floor under the loss at the cost of the premium.
Example. An investor buys a put to insure shares she owns.
Exam trap. This statement is false: A protective put adds to the loss when prices fall.
Bull call spread
A bull call spread buys a lower-strike call and sells a higher-strike call, limiting both the cost and the profit.
Example. A trader buys a 500 call and sells a 520 call.
Exam trap. This statement is false: A bull call spread has unlimited profit.
Long straddle
A long straddle buys a call and a put at the same strike and expiry, profiting from a large move in either direction.
Example. A trader expects a big move after results but not its direction.
Exam trap. This statement is false: A long straddle profits if the price stays still.
Long strangle
A long strangle buys an out-of-the-money call and an out-of-the-money put, costing less than a straddle but needing a bigger move.
Example. A trader buys a 520 call and a 480 put.
Exam trap. This statement is false: A long strangle uses the same strike for both options.
Collar
A collar holds the underlying, buys a put and sells a call, limiting both downside and upside, often at a low net cost.
Example. An investor protects shares with a put financed by selling a call.
Exam trap. This statement is false: A collar leaves both ends of risk unlimited.
Bear put spread
A bear put spread buys a higher-strike put and sells a lower-strike put, profiting from a moderate fall with limited risk.
Example. A trader buys a 500 put and sells a 480 put.
Exam trap. This statement is false: A bear put spread profits from a rise.
Butterfly spread
A butterfly spread uses three strikes to profit if the price stays near the middle strike, with limited risk and limited reward.
Example. A trader expects little movement and uses three strikes.
Exam trap. This statement is false: A butterfly spread profits from a large move.
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 “Protective put”?
- A person whose derivatives turnover or losses cross specified thresholds may need to get accounts audited under the tax law.
- A protective put buys a put against a held position, setting a floor under the loss at the cost of the premium.
- The clearing corporation becomes the counterparty to every trade through novation, guaranteeing settlement and managing risk.
- The MWPL caps the total open positions across all traders in a stock's derivatives; when it reaches 95% the stock enters a ban period.
Q2. Which statement best describes “Covered call”?
- A market maker quotes continuous two-way prices to provide liquidity in a contract.
- A covered call holds the underlying and sells a call against it, earning the premium but capping the upside.
- Option premium is settled in cash on T+1; the buyer pays and the seller receives.
- Orders on the exchange are matched on price-time priority: the best price first, and among equal prices the earliest order.
Q3. Which term is described here? A bull call spread buys a lower-strike call and sells a higher-strike call, limiting both the cost and the profit.
- Contract note
- Short put payoff
- J.R. Varma Committee
- Bull call spread
Q4. Which statement about “Butterfly spread” is correct?
- A protective put adds to the loss when prices fall.
- A butterfly spread profits from a large move.
- Suitability is irrelevant to broking.
- A butterfly spread uses three strikes to profit if the price stays near the middle strike, with limited risk and limited reward.
Q5. Which term is described here? A collar holds the underlying, buys a put and sells a call, limiting both downside and upside, often at a low net cost.
- Premium settlement
- Collar
- Professional clearing member
- Ban period
Q6. Which term is described here? A long strangle buys an out-of-the-money call and an out-of-the-money put, costing less than a straddle but needing a bigger move.
- Long straddle
- Long strangle
- Index rebalancing
- SEBI Act
Frequently asked questions
How much of NISM Series VIII comes from Unit 5?
Unit 5 (Option trading strategies) usually carries about 3% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series VIII Unit 5?
Covered call, protective put, spreads, straddle, strangle.
Are these NISM Series VIII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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