Unit ko samjho · NISM Series VIII

Application of Options

33 questions is unit mein

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A trader buys one 23,000 call for a premium of 180 points. Assume a lot size of 65 units. At expiry the underlying settles at 23,320. Ignoring charges, what is the net profit?
A trader buys one 24,000 put for 150 points. Assume a lot size of 65. At expiry the underlying is 24,220. Ignoring charges, what is the result?
A trader buys a 24,100 call for a premium of 165 points and holds it to expiry. Ignoring charges, the break-even underlying level is:
A trader sells one 24,500 call and receives 120 points. Assume a lot size of 65. At expiry the underlying is 24,740. Ignoring charges, what is the writer’s net result?
A bull call spread is created by buying a 24,000 call for 170 points and selling a 24,300 call for 70 points, same expiry. Ignoring charges, its expiry break-even is:
Using the same bull call spread—long 24,000 call at 170, short 24,300 call at 70—and assuming a lot size of 65, what is the maximum profit?
A trader constructs a defined-risk bullish call spread on a 65-unit contract. The lower-strike call costs 170 points and the higher-strike call brings in 70 points. Ignoring charges, what is the greatest rupee loss the position can suffer?
A trader buys a 25,000 straddle by paying 210 points for the call and 190 points for the put. Ignoring charges, the two expiry break-even levels are:
A trader expects the underlying to make a very large move before expiry but has no reliable view on whether the move will be up or down. Which strategy most directly expresses that view?
A standard short iron condor is established for a net credit. If all four legs have the same expiry, what is its maximum profit?
Which position is a covered call on a stock?
For European options on a non-dividend-paying stock with the same strike and expiry, the stock is ₹1,000, the present value of the strike is ₹980 and the put premium is ₹40. What call premium does put-call parity imply?
An option’s delta is primarily used to estimate the change in the option premium for a small change in:
Under the usual textbook approximation for a near-term at-the-money call on a non-dividend-paying underlying, its delta is closest to:
All else equal in the usual option-pricing setting, what does negative theta for a long option indicate?
Other things being broadly comparable, gamma tends to be largest for options that are:
Vega measures the sensitivity of an option’s price primarily to a change in:
Which description best captures implied volatility?
An investor owns shares and buys a put on the same underlying to limit downside while retaining upside participation. This combination is called a:
A trader buys a 25,200 call for 70 points and a 24,800 put for 60 points, same expiry. Ignoring charges, the expiry break-even levels of this long strangle are:
A long call butterfly uses strikes 24,000/24,200/24,400: buy one 24,000 call, sell two 24,200 calls, and buy one 24,400 call. The net debit is 45 points. Assume a lot size of 65. What is the maximum profit?
Ignoring margining and assuming the underlying price has no upper bound, the potential loss on a naked short call is:
A trader sells a 25,000 call for 210 points and a 25,000 put for 170 points, creating a short straddle. Assume a lot size of 65. At expiry the index is 25,220. Ignoring charges, what is the net result?
A trader is long 10 call-option contracts. Each contract represents 50 shares and each call currently has delta +0.60. Ignoring gamma and other changes, approximately how many shares should the trader sell short to create an initial delta-neutral hedge?
For European call and put options with the same strike and expiry, what expiry payoff is created by a long call plus a short put?
For European options on a non-dividend-paying stock, spot is ₹1,000, the call is ₹70 and the present value of the ₹1,000 strike is ₹975. What put value does put-call parity give?
An option series has put open interest of 12 lakh contracts and call open interest of 8 lakh contracts. What is the put-call ratio on open interest?
A trader creates a bull put spread by selling a 24,000 put for 150 points and buying a 23,800 put for 70 points. Ignoring charges, what is the maximum loss per index unit?
A trader sells a 24,500 call for 120 points and buys a 24,700 call for 50 points, forming a bear call spread. Ignoring charges, what is the maximum loss per index unit?
An investor owns shares, buys a protective put below the current price and finances part of that protection by selling a call above the current price. What strategy is this?
Which construction represents a standard bear put spread with the same expiry?
An investor buys a share at ₹1,000 and simultaneously buys a ₹950 put for ₹20. Ignoring charges and dividends, what is the maximum loss per share at option expiry?
Which position is a basic long call calendar spread?

Zaroori ideas

Practice bank se · 1

A trader buys one 23,000 call for a premium of 180 points. Assume a lot size of 65 units. At expiry the underlying settles at 23,320. Ignoring charges, what is the net profit?

At , call = 23,320 − 23,000 = 320 points. Net profit per unit = 320 − 180 = 140 points. For 65 units, profit = 140 × 65 = ₹9,100. Remember: Long-call net P&L at expiry = max(S−K,0) − premium, multiplied by contract quantity.

Hint Common mistake: Using gross intrinsic payoff without subtracting the premium paid.

VIII-037

Practice bank se · 2

A trader buys one 24,000 put for 150 points. Assume a lot size of 65. At expiry the underlying is 24,220. Ignoring charges, what is the result?

Because the expiry price is above the put , the put expires with zero intrinsic value. The buyer loses the premium paid: 150 × 65 = ₹9,750. Remember: An OTM long option at expiry loses the premium paid.

Hint Common mistake: Ignoring the premium because the option is not exercised.

VIII-038

Practice bank se · 3

A trader buys a 24,100 call for a premium of 165 points and holds it to expiry. Ignoring charges, the break-even underlying level is:

For a long call held to expiry, = strike price + premium paid = 24,100 + 165 = 24,265. Remember: Long-call break-even at expiry = strike + premium.

Hint Common mistake: Forgetting that the premium must also be recovered before the trade breaks even.

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Practice bank se · 4

A trader sells one 24,500 call and receives 120 points. Assume a lot size of 65. At expiry the underlying is 24,740. Ignoring charges, what is the writer’s net result?

The call finishes 240 points in the money. The writer received 120 points but owes 240 points of intrinsic value, so net loss = 120 points per unit. Total loss = 120 × 65 = ₹7,800. Remember: Short-call net P&L at expiry = premium received − max(S−K,0).

Hint Common mistake: Ignoring the premium credit or, conversely, treating the premium as profit regardless of expiry payoff.

VIII-040

Practice bank se · 5

A bull call spread is created by buying a 24,000 call for 170 points and selling a 24,300 call for 70 points, same expiry. Ignoring charges, its expiry break-even is:

The net debit is 170 − 70 = 100 points. A bull call spread breaks even at the lower strike plus the net debit: 24,000 + 100 = 24,100. Remember: Bull call spread break-even = lower strike + net debit.

Hint Common mistake: Using the premium of only one leg instead of the net premium of the spread.

VIII-041

Practice bank se · 6

Using the same bull call spread—long 24,000 call at 170, short 24,300 call at 70—and assuming a lot size of 65, what is the maximum profit?

The strike width is 300 points and the net debit is 100 points, so maximum profit is 300 − 100 = 200 points per unit. For 65 units, maximum profit = 200 × 65 = ₹13,000. Remember: Bull call spread max profit = strike width − net debit, times contract quantity.

Hint Common mistake: Forgetting to deduct the spread’s initial net debit from the strike-width payoff.

VIII-042

Practice bank se · 7

A trader constructs a defined-risk bullish call spread on a 65-unit contract. The lower-strike call costs 170 points and the higher-strike call brings in 70 points. Ignoring charges, what is the greatest rupee loss the position can suffer?

The strategy is entered for a net debit of 100 points. If both calls expire worthless, that debit is lost. Maximum loss = 100 × 65 = ₹6,500. Remember: Maximum loss on a debit bull call spread is the net debit paid.

Hint Common mistake: Treating the long call’s premium alone as the loss instead of netting the short-call premium received.

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Practice bank se · 8

A trader buys a 25,000 straddle by paying 210 points for the call and 190 points for the put. Ignoring charges, the two expiry break-even levels are:

Total premium paid = 210 + 190 = 400 points. A long straddle breaks even at strike − total premium and strike + total premium: 25,000 − 400 = 24,600 and 25,000 + 400 = 25,400. Remember: Long straddle break-evens = common strike ± total premium paid.

Hint Common mistake: Using only the call or only the put premium to calculate break-even.

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Practice bank se · 9

A trader expects the underlying to make a very large move before expiry but has no reliable view on whether the move will be up or down. Which strategy most directly expresses that view?

A long straddle buys a call and a put with the same strike and expiry. It benefits from a sufficiently large move in either direction, while its maximum loss is the combined premium paid if the underlying remains near the strike. Remember: Large move expected, direction uncertain → long-volatility structures such as a long straddle.

Hint Common mistake: Selecting a short straddle because it also contains both a call and put, while ignoring the direction of its volatility exposure.

VIII-045

Practice bank se · 10

A standard short iron condor is established for a net credit. If all four legs have the same expiry, what is its maximum profit?

A short iron condor combines an out-of-the-money short put spread and short call spread for an initial net credit. Its maximum profit is the net credit received, achieved when the underlying expires between the two short strikes so that all options expire without intrinsic loss. Remember: A credit iron condor has limited profit equal to net credit and limited loss determined by spread width minus that credit.

Hint Common mistake: Confusing the iron condor’s maximum loss formula with its maximum profit.

VIII-046

Practice bank se · 11

Which position is a covered call on a stock?

A covered call consists of owning the underlying shares and writing a call against them. The stock holding “covers” the delivery/economic exposure created by the short call if the call finishes in the money. Remember: Covered call = long underlying + short call.

Hint Common mistake: Confusing a protective put with a covered call because both begin with a long stock position.

VIII-047

Practice bank se · 12

For European options on a non-dividend-paying stock with the same strike and expiry, the stock is ₹1,000, the present value of the strike is ₹980 and the put premium is ₹40. What call premium does put-call parity imply?

Rearrange parity: C = P + S − PV(K) = 40 + 1,000 − 980 = ₹60. A materially different observed call price, after allowing for costs and assumptions, would indicate a relative pricing inconsistency among the parity legs. Remember: Put-call parity links call, put, spot and the present value of the strike for matched European options.

Hint Common mistake: Memorising the equation but moving PV(K) to the wrong side when solving for the call.

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Practice bank se · 13

An option’s delta is primarily used to estimate the change in the option premium for a small change in:

measures the sensitivity of an option’s price to a change in the price of the underlying, holding other factors approximately constant. It is also central to delta-hedging calculations. Remember: Delta connects option-price changes to small underlying-price changes and is used in directional-risk hedging.

Hint Common mistake: Mixing up delta with , or rho.

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Practice bank se · 14

Under the usual textbook approximation for a near-term at-the-money call on a non-dividend-paying underlying, its delta is closest to:

An at-the-money call commonly has a delta near +0.5 under standard textbook assumptions. The exact value depends on time, volatility, interest rates, dividends and model conventions, so +0.5 should be read as an approximation rather than an invariant constant. Remember: ATM call delta is often approximated as +0.5, but exact delta is model- and input-dependent.

Hint Common mistake: Treating +0.5 as an exact universal value for every at-the-money call.

VIII-050

Practice bank se · 15

All else equal in the usual option-pricing setting, what does negative theta for a long option indicate?

Theta measures sensitivity of option value to the passage of time. Long options commonly have negative theta: with other inputs unchanged, the option’s time value tends to decay as expiry approaches. Remember: Theta is time-decay sensitivity. Long options usually pay for time and therefore generally have negative theta.

Hint Common mistake: Confusing theta with delta or assuming the strike changes with time.

VIII-051

Practice bank se · 16

Other things being broadly comparable, gamma tends to be largest for options that are:

Gamma measures how rapidly delta changes when the underlying moves. Gamma is typically concentrated around at-the-money strikes and becomes especially pronounced as expiry approaches, because delta can shift quickly when the option moves between in-the-money and out-of-the-money states. Remember: Gamma measures change in delta. It is generally most intense near the strike, especially close to expiry.

Hint Common mistake: Assuming the option with the highest premium necessarily has the highest gamma.

VIII-052

Practice bank se · 17

Vega measures the sensitivity of an option’s price primarily to a change in:

Vega estimates how much an option’s value changes when the volatility input changes, with other inputs held approximately constant. Long options generally have positive vega in standard models. Remember: Vega = option-price sensitivity to volatility.

Hint Common mistake: Confusing volatility sensitivity with directional sensitivity, which is delta.

VIII-053

Practice bank se · 18

Which description best captures implied volatility?

Implied volatility is backed out from the observed option price: it is the volatility input which, when used with the other model inputs, reproduces the market premium. It is not a guarantee of future realised volatility. Remember: Implied volatility is inferred from option prices. Realised/historical volatility is measured from price data.

Hint Common mistake: Treating implied volatility as a forecast that must come true.

VIII-054

Practice bank se · 19

An investor owns shares and buys a put on the same underlying to limit downside while retaining upside participation. This combination is called a:

A protective put combines a long underlying position with a long put. The put establishes a floor on the economic value of the combined position below the strike, subject to the premium paid, while the shares still participate in upside. Remember: Protective put = insurance-like downside protection for a long underlying position.

Hint Common mistake: Confusing downside protection from a put with premium income from a covered call.

VIII-055

Practice bank se · 20

A trader buys a 25,200 call for 70 points and a 24,800 put for 60 points, same expiry. Ignoring charges, the expiry break-even levels of this long strangle are:

Total premium paid = 70 + 60 = 130 points. Lower break-even = put strike − total premium = 24,800 − 130 = 24,670. Upper break-even = call strike + total premium = 25,200 + 130 = 25,330. Remember: Long strangle break-evens use the total premium across both legs, not each leg’s premium separately.

Hint Common mistake: Subtracting only put premium from the put strike and adding only call premium to the call strike.

VIII-056

Practice bank se · 21

A long call butterfly uses strikes 24,000/24,200/24,400: buy one 24,000 call, sell two 24,200 calls, and buy one 24,400 call. The net debit is 45 points. Assume a lot size of 65. What is the maximum profit?

The equal strike width is 200 points. A long butterfly’s maximum profit per unit is spread width − net debit = 200 − 45 = 155 points, achieved at the middle strike at expiry. Total maximum profit = 155 × 65 = ₹10,075. Remember: Long butterfly max profit = wing width − net debit. Max loss = net debit.

Hint Common mistake: Using the full strike width as profit without subtracting the initial debit.

VIII-057

Practice bank se · 22

Ignoring margining and assuming the underlying price has no upper bound, the potential loss on a naked short call is:

A naked call writer receives a fixed premium but is exposed to increasing losses as the underlying rises above the strike. Because there is no theoretical upper limit to the underlying price, the short call’s potential loss is theoretically unlimited. Remember: Naked short call: limited profit, theoretically unlimited loss.

Hint Common mistake: Equating the initial OTM status with permanently limited risk.

VIII-058

Practice bank se · 23

A trader sells a 25,000 call for 210 points and a 25,000 put for 170 points, creating a short straddle. Assume a lot size of 65. At expiry the index is 25,220. Ignoring charges, what is the net result?

Total premium received = 210 + 170 = 380 points. At 25,220, the call finishes 220 points in the money and the put expires worthless. Net profit = 380 − 220 = 160 points. For 65 units, profit = 160 × 65 = ₹10,400. Remember: For a short straddle, start with total premium received and subtract the intrinsic payout of the in-the-money leg at expiry.

Hint Common mistake: Calculating only the losing option leg and forgetting the premiums collected on both legs.

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Practice bank se · 24

A trader is long 10 call-option contracts. Each contract represents 50 shares and each call currently has delta +0.60. Ignoring gamma and other changes, approximately how many shares should the trader sell short to create an initial delta-neutral hedge?

Total option delta exposure = 10 contracts × 50 shares × 0.60 = +300 share-equivalents. To offset this first-order exposure, the trader sells approximately 300 shares, producing -300 share delta. Remember: Delta hedge quantity = option delta × contract multiplier × number of contracts, with the opposite sign.

Hint Common mistake: Hedging the full notional share count instead of the delta-adjusted exposure.

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Practice bank se · 25

For European call and put options with the same strike and expiry, what expiry payoff is created by a long call plus a short put?

At expiry, long call minus long put (that is, long call + short put) produces max(ST−K,0) − max(K−ST,0) = ST−K. That is the payoff of a long forward struck at K. Remember: Long call + short put at the same strike/expiry creates synthetic long-forward exposure.

Hint Common mistake: Calling the combination a long stock without accounting for the financing/strike leg implied by put-call parity.

VIII-125

Practice bank se · 26

For European options on a non-dividend-paying stock, spot is ₹1,000, the call is ₹70 and the present value of the ₹1,000 strike is ₹975. What put value does put-call parity give?

Rearrange parity: P = C + PV(K) − S = 70 + 975 − 1,000 = ₹45. Remember: Use the parity equation algebraically. Do not infer the put price from moneyness alone.

Hint Common mistake: Forgetting that the strike is discounted to present value in the stated European no-dividend setup.

VIII-126

Practice bank se · 27

An option series has put open interest of 12 lakh contracts and call open interest of 8 lakh contracts. What is the put-call ratio on open interest?

PCR = put open interest ÷ call open interest = 12 ÷ 8 = 1.5. PCR is an observed positioning ratio. By itself it is not a guaranteed direction forecast. Remember: State the PCR convention and then calculate it. Interpretation should be combined with other information.

Hint Common mistake: Automatically treating PCR above 1 as a certain bullish or bearish signal without context.

VIII-127

Practice bank se · 28

A trader creates a bull put spread by selling a 24,000 put for 150 points and buying a 23,800 put for 70 points. Ignoring charges, what is the maximum loss per index unit?

The spread width is 200 points. Net credit received is 150 − 70 = 80 points. Maximum loss = spread width − net credit = 200 − 80 = 120 points. Remember: For a defined-risk credit spread, max loss = strike width − net credit.

Hint Common mistake: Calling the net credit the maximum loss.

VIII-129

Practice bank se · 29

A trader sells a 24,500 call for 120 points and buys a 24,700 call for 50 points, forming a bear call spread. Ignoring charges, what is the maximum loss per index unit?

The strike width is 200 points. Net credit is 120 − 50 = 70. Maximum loss = 200 − 70 = 130 points. Remember: Credit-spread risk is capped by the strike width minus the initial credit.

Hint Common mistake: Ignoring the long protective call when evaluating the short call's risk.

VIII-130

Practice bank se · 30

An investor owns shares, buys a protective put below the current price and finances part of that protection by selling a call above the current price. What strategy is this?

A collar combines a long underlying position with a long put for downside protection and a short call that limits upside in exchange for premium income. It creates a defined protective range around the stock position. Remember: A collar trades some upside participation for cheaper downside protection.

Hint Common mistake: Confusing a collar with a protective put because both contain a long put.

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Practice bank se · 31

Which construction represents a standard bear put spread with the same expiry?

A bear put spread is typically created by buying a higher-strike put and selling a lower-strike put of the same expiry. The long higher-strike put provides bearish exposure while the short lower-strike put reduces cost but caps the maximum profit. Remember: Vertical put spreads use two strikes: bear put = long higher strike, short lower strike.

Hint Common mistake: Remembering only 'two puts' but reversing which strike is bought and sold.

VIII-132

Practice bank se · 32

An investor buys a share at ₹1,000 and simultaneously buys a ₹950 put for ₹20. Ignoring charges and dividends, what is the maximum loss per share at option expiry?

The put establishes a minimum sale value of ₹950 at expiry. Starting from ₹1,000, the protected stock downside is ₹50, and the investor also paid ₹20 premium. Maximum loss = ₹50 + ₹20 = ₹70 per share. Remember: A protective put floor must include the cost of the put when measuring maximum loss.

Hint Common mistake: Ignoring the option premium when calculating the protected position's worst result.

VIII-133

Practice bank se · 33

Which position is a basic long call calendar spread?

A calendar spread primarily differs by expiry. A common long call calendar sells the shorter-dated call and buys the longer-dated call at the same strike, creating exposure to the differing time-decay and volatility characteristics of the two maturities. Remember: Calendar spreads separate option maturities. Vertical spreads separate strikes.

Hint Common mistake: Calling any two-option spread a calendar spread.

VIII-134

Is topic ka lesson padho

Expiry Day

Expiry day is the last day on which a derivative contract can be traded.

Aage padho

Intrinsic Value

Intrinsic value is the part of an option's premium that would survive if the contract expired at this instant.

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Strike Price

The strike price is the level at which an option can be exercised.

Aage padho